Feds explore taking bigger stakes in shaky banks
AP – In this Nov. 25, 2008 file photo, a customer exits a Citibank branch in
New York. The Wall Street Journal … WASHINGTON – The government on Monday moved
toward dramatically expanding its
ownership stakes in the nation's banks — with Citigroup, the struggling titan
of the industry, apparently at the top
of the list. Wall Street responded as it has with the rollout of almost every
other plan to fix the financial crisis,
taking a big drop and sending the Dow Jones industrials to its lowest level in
a dozen years.
The Treasury Department, the Federal Reserve and other banking regulators said
they could convert the government's stock
in the banks from preferred shares to common shares.
The strategy, which could be applied retroactively
to banks that received money in the first incarnation of the bailout, carries
risks. But it avoids, at least for now,
having to tap more taxpayer money or resort to full-fledged nationalization.
Citigroup Inc. — perhaps the biggest name in
American banking — has approached the regulators about ways the government
could help strengthen the bank, including the
stock conversion plan, according to people familiar with the discussions. They
spoke on condition of anonymity because
they are not authorized to speak on behalf of the government or the company. A
Citigroup spokesman declined comment.
The stock conversion could be available for other banks as well, the same
sources said.
Regulators, reinforcing what the White House
has said, insisted that keeping banks private is a priority. But federal
officials are walking a difficult line because
the government could still have huge stakes in banks.
Citigroup already has received $45 billion in
bailout money, plus guarantees to cover losses on hundreds of billions of
dollars in risky investments.
"What we are doing here is we're creeping our
way toward nationalization," said Terry Connelly, dean of Golden Gate
University's Ageno School of Business in San Francisco.
The conversion plan would give the government
greater flexibility in dealing with ailing banks. It would give the government
voting shares, and therefore more
say in a bank's operations.
But common shares absorb losses before preferred
shares do, which means taxpayers would be on the hook if banks keep writing
down billions of dollars' worth of
rotten assets, such as dodgy mortgages, as many analysts expect they will.
On the other hand, common stock in banks
is incredibly cheap, and taxpayers would reap gains if the banks come back to
health and the stock price goes up.
Sen. Charles Grassley of Iowa, the top-ranking
Republican on the Senate Finance Committee, demanded more details from
Treasury about the stock-conversion option.
"This move could expose taxpayers to even more
risk," he said. "We all need to know what Treasury hopes to accomplish here and
whether the risks are worth any
benefits," he added.
Citigroup stock rose about 10 percent Monday,
its first gain in eight days. The bank has posted five straight quarterly
losses, including $8.3 billion in the fourth
quarter. It is working to cut expenses, sell assets and return to a profit.
The broader market sold off. The Dow lost 250
points, closing at about 7,115. At its peak less than a year and a half ago,
the Dow stood at nearly twice that.
Monday's close for both the Dow industrials and the broader Standard & Poor's
500 was the lowest since 1997.
Some economists did not seem much more
optimistic than investors.
"I don't think this is the end solution. It
is a very haphazard way of trying to deal with the problems and simply
postponing the inevitable — more bank failures
and takeovers by the FDIC," said Simon Johnson, former chief economist to the
International Monetary Fund and a professor
at the Massachusetts Institute of Technology's Sloan School of Management.
It is also far from clear whether the Obama
plan would entice private companies to step forward and invest in banks.
Obama's treasury secretary, Timothy Geithner,
has said using both public and private money to restore the banks to health is
the plan.
"A lot of money has been thrown at the financial
sector. The hope is that we're spending that money wisely and not just
throwing money at basket cases, which remains to
be seen," said David Ely, a banking professor at San Diego State University.
Friedman, Billings, Ramsey & Co. analyst Paul
Miller said while the move toward some sort of nationalization might be a
"scary proposition for investors," it is
likely to provide the quickest and cheapest option to help rid banks of bad
assets.
The conversion plan would eliminate the 5 percent
dividend that banks already receiving bailout money are currently paying the
government on its preferred shares, allowing
the banks to hold on to more cash.
It also could bring banks closer to the mix of
capital that the government will want to see when it starts conducting its
"stress tests" on Wednesday to determine
the health of banks, experts said.
A government switch to common shares would also
reduce the value of shares held by existing stockholders in the bank.
Everyday bank customers probably would not
notice a difference. They would be able to go about their normal banking
business, and their deposits would still be
federally insured up to $250,000.
On Friday, regulators closed a small bank in
Oregon — the 14th federally insured institution to fail this year. In 2008, the
government seized 25 banks, more than
in the previous five years combined.
Of the first $350 billion in bailout funds,
roughly $250 billion was pledged to provide cash injections to banks. The Obama
administration has not said how much of
the second $350 billion will be used for that purpose.
Monday's statement, issued by the Treasury, the
Fed, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and
the comptroller of the currency, did not
name specific banks.
"Currently, the major U.S. banking institutions
have capital in excess of the amounts required to be considered
well-capitalized," the regulators said.
Fed Chairman Ben Bernanke, who goes to Capitol
Hill on Tuesday to provide lawmakers with an update on the economy, is likely
to face tough questions over the
government's bank rescue program.
The Fed last week provided a gloomy assessment
on the economy, warning that any recovery would be gradual and unemployment —
now at 7.6 percent, the highest
in more than 16 years — would stay higher than normal into 2011.
The White House again played down persistent
speculation that banks could be effectively nationalized.
"The president believes that a privately held
banking system regulated by the federal government is the best way to go about
this," White House spokesman Robert
Gibbs said Monday.
___
AP Business Writers Christopher S. Rugaber in Washington and Madlen Read in New
York contributed to this report.
_______________________________________________
pen-l mailing list
[email protected]
https://lists.csuchico.edu/mailman/listinfo/pen-l
