.U.S. to Take Equity Stakes in 9 Banking Behemoths
WASHINGTON -- Under a new stabilization program, the U.S. government announced plans Tuesday to buy stock in nine major banks, a historic action to restore confidence in the nation's financial system.
The Bush administration plans to inject $250 billion into the banking industry in the coming weeks, and is now mulling whether to tap the second installment of its $700 billion authority.
U.S. Treasury Secretary Henry Paulson and other Bush administration officials were in discussions about whether they will need to access the next $100 billion, a Treasury official said.
Earlier Tuesday, President George W. Bush said the decision to buy shares in the nation's leading banks -- a kind of federal intervention not seen since the Depression era -- was "not intended to take over the free market but to preserve it."
The government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. -- including the soon-to-be acquired Merrill Lynch -- Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp.
The Treasury said under the program, participating financial institutions will be subject to more stringent executive compensation rules for the period during which Treasury holds equity. Participating firms, for instance, are prohibited from making any golden parachute payments to senior executives. They must also agree not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. The department has already issued interim final rules for these executive compensation standards.
Banks have a month to join Treasury Department's capital purchase program. They must elect to participate before 5 p.m. on Nov. 14. Mr. Paulson said that nine "healthy" financial institutions had already agreed to accept cash from the government.
A U.S. Treasury official said those deals would close "within days, not weeks." However, he declined to confirm the names of the nine banks that will receive the government money or give the size of the injections.
"The efforts are designed to directly benefit the American people by stabilizing the financial system and helping the economy recover,'' President Bush said.
Additionally, federal regulators announced that they'd guarantee new bank debt and expand insurance for non-interest-bearing accounts. They also issued new details on a plan to backstop the commercial paper market, where major corporations go for critical loans to fund their daily operations.
"They've exposed the whole toolkit," said Vincent Reinhart, former head of the Fed's monetary affairs division. "What do you do if this doesn't work? You do more of it."
Providing Plan Details
Mr. Paulson, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair on Tuesday outlined parts of the government's plan.
Mr. Paulson said that "government owning a stake in any private U.S. company is objectionable to most Americans," but said the alternative "of leaving businesses and consumers without access to financing is totally unacceptable."
Some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure from Mr. Paulson in a meeting Monday. During the financial crisis, the government has steadily increased its involvement in financial markets, culminating with a move that rivals the breadth of the government's response to the Great Depression. It intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.
Formulated jointly by the Treasury, the Fed and the FDIC, these moves announced Tuesday are designed to keep money flowing through the financial system, ensuring that banks continue lending to companies, consumers and each other. A freeze in these markets rippled through the economy and helped cause stocks to crater last week.
Along with the government's involvement come certain restrictions, such as caps on executive pay. For example, firms can't write new employment contracts containing golden parachutes and their ability to use certain executive salaries as a tax deduction is capped. These restrictions are relatively weak compared with what congressional Democrats had wanted when they approved this spending, a potential flash point.
Some critics also say Treasury should have formulated a comprehensive plan earlier in the crisis. Even if this move helps mend credit markets, the economy is likely to suffer in the months ahead from the aftershocks of the recent turmoil.
Treasury will buy $25 billion in preferred stock in Bank of America -- including Merrill Lynch -- as well as J.P. Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman and Morgan Stanley; $3 billion in Bank of New York Mellon; and about $2 billion in State Street.
The government will purchase preferred stock, an equity investment designed to avoid hurting existing shareholders and deterring new ones. Such shares typically don't come with voting rights. They will carry a 5% annual dividend that rises to 9% after five years, according to a person familiar with the matter. By investing in several big firms at once, the government hopes to avoid placing a stigma on any one firm for getting government help.
The plan will be structured to encourage firms to bring in private capital. For instance, firms returning capital to the government by 2009 may get better terms for the government's stake, a person familiar with the discussions said.
FDIC Moves
Among the other key components of the plan is the FDIC temporarily guarantee, for a fee, certain types of new debt called senior unsecured debt issued by banks and thrifts. This would apply to debt issued by June 30 with maturities up to three years. One problem plaguing credit markets has been a fear among financial institutions that it is unsafe to lend to each other even for periods of a few days. U.S. officials hope this guarantee removes that fear, which could bring down short-term lending rates, such as the London interbank offered rate, or Libor, a benchmark for consumer and business loans.
The FDIC is also temporarily offering banks unlimited deposit insurance for non-interest bearing bank accounts typically used by small businesses, through 2009. This would be voluntary for banks, and would extend the $250,000 per depositor limit lawmakers agreed on two weeks ago. To use these new powers, the FDIC is invoking a "systemic risk" clause in federal banking law that allows it to take extreme steps to prevent shocks to the economy.
The FDIC's central role in the plan is consistent with its presence during past banking crises, the Great Depression and the savings and loan crisis. Each crisis sparked a major boost in the agency's power.
The shift brings U.S. policy more in line with that of other countries. Monday, the U.K., Germany, France, Spain and Italy provided further details of measures to buy stakes in struggling banks and offer lending guarantees. The U.K., which first formulated such a plan, is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three big banks.
The U.S. plan to inject capital into banks is expected to be open to almost all such institutions, with a focus on getting the participation of the firms most important to the financial system, according to people familiar with the matter. Treasury's main goal is to attract private capital. To make sure private investors aren't scared away, it is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants, these people said.
Officials at the Treasury and Federal Reserve have been looking for a comprehensive approach to the credit crisis after a series of ad hoc interventions and say they didn't have the authority to make such a comprehensive move until Congress passed the bailout bill. The government's various moves, from saving mortgage giants Fannie Mae and Freddie Mac to letting Lehman Brothers Holdings Inc. fail, have confused investors and frozen many in place at a time when the banking system was desperate for fresh capital. That contributed to what in essence was a high-level run on Wall Street banks, with funding drying up overnight.
The government's hope is that the new plan will more thoroughly address the problems of ailing financial institutions and persuade private investors that government involvement won't come at their expense.
For troubled assets there is the Troubled Asset Relief Program, created by the $700 billion bailout bill, which gives the Treasury Department authority to acquire bad assets from banks and other financial institutions. TARP will also be used by Treasury when it puts new equity into banks.
The other steps, including the FDIC's role in guaranteeing new funds raised by banks and thrifts, are designed to address the way banks fund themselves, freeing them to start lending again.
Meanwhile, the Federal Reserve announced that beginning Oct. 27, a new program will be open to fund purchases of commercial paper of three-month maturity from high-quality issuers. It will cease purchasing commercial paper on April 30, unless the program is extended.
Unsecured commercial paper will be priced at the three-month overnight index swap rate plus 100 basis points with an additional 100-basis-point surcharge. Asset-backed commercial paper will be priced at the OIS rate plus 300 basis points.
Libor rates, which are set daily in London, fell in anticipation of Tuesday's announcement. The largest decline was in overnight Libor rates, though one- and three-month rates also fell. Prices of U.S. Treasury bills, which usually benefit from flight-to-quality buying, fell Tuesday -- a sign that investors are willing to take on more risk.
Mr. Bernanke on Tuesday made clear that regulators will keep taking actions until the turmoil in financial markets eases. "We will not stand down until we have achieved our goals of repairing and reforming our financial system and thereby restoring prosperity to our economy," he said.
WSJ
This is mind boggling. The biggest government taking in history. And you have to trust the government that it will sell back the stock! HA!, it will never happen. That stock will become federal property and they will hold it for a 1000 years to come.
To think that solvent bank are actually considering volunteering to let the government take property like this.
Stalin is dancing in his glass crypt....even he had to shoot people in the head to get their cooperation. And here we come volunteering the same...
Shame on you America.
Can't someone sue the government to test the constitutionality of all this.
Where are the "Republicans" when you need one?
The Bush administration plans to inject $250 billion into the banking industry in the coming weeks, and is now mulling whether to tap the second installment of its $700 billion authority.
U.S. Treasury Secretary Henry Paulson and other Bush administration officials were in discussions about whether they will need to access the next $100 billion, a Treasury official said.
Earlier Tuesday, President George W. Bush said the decision to buy shares in the nation's leading banks -- a kind of federal intervention not seen since the Depression era -- was "not intended to take over the free market but to preserve it."
The government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. -- including the soon-to-be acquired Merrill Lynch -- Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp.
The Treasury said under the program, participating financial institutions will be subject to more stringent executive compensation rules for the period during which Treasury holds equity. Participating firms, for instance, are prohibited from making any golden parachute payments to senior executives. They must also agree not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. The department has already issued interim final rules for these executive compensation standards.
Banks have a month to join Treasury Department's capital purchase program. They must elect to participate before 5 p.m. on Nov. 14. Mr. Paulson said that nine "healthy" financial institutions had already agreed to accept cash from the government.
A U.S. Treasury official said those deals would close "within days, not weeks." However, he declined to confirm the names of the nine banks that will receive the government money or give the size of the injections.
"The efforts are designed to directly benefit the American people by stabilizing the financial system and helping the economy recover,'' President Bush said.
Additionally, federal regulators announced that they'd guarantee new bank debt and expand insurance for non-interest-bearing accounts. They also issued new details on a plan to backstop the commercial paper market, where major corporations go for critical loans to fund their daily operations.
"They've exposed the whole toolkit," said Vincent Reinhart, former head of the Fed's monetary affairs division. "What do you do if this doesn't work? You do more of it."
Providing Plan Details
Mr. Paulson, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair on Tuesday outlined parts of the government's plan.
Mr. Paulson said that "government owning a stake in any private U.S. company is objectionable to most Americans," but said the alternative "of leaving businesses and consumers without access to financing is totally unacceptable."
Some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure from Mr. Paulson in a meeting Monday. During the financial crisis, the government has steadily increased its involvement in financial markets, culminating with a move that rivals the breadth of the government's response to the Great Depression. It intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.
Formulated jointly by the Treasury, the Fed and the FDIC, these moves announced Tuesday are designed to keep money flowing through the financial system, ensuring that banks continue lending to companies, consumers and each other. A freeze in these markets rippled through the economy and helped cause stocks to crater last week.
Along with the government's involvement come certain restrictions, such as caps on executive pay. For example, firms can't write new employment contracts containing golden parachutes and their ability to use certain executive salaries as a tax deduction is capped. These restrictions are relatively weak compared with what congressional Democrats had wanted when they approved this spending, a potential flash point.
Some critics also say Treasury should have formulated a comprehensive plan earlier in the crisis. Even if this move helps mend credit markets, the economy is likely to suffer in the months ahead from the aftershocks of the recent turmoil.
Treasury will buy $25 billion in preferred stock in Bank of America -- including Merrill Lynch -- as well as J.P. Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman and Morgan Stanley; $3 billion in Bank of New York Mellon; and about $2 billion in State Street.
The government will purchase preferred stock, an equity investment designed to avoid hurting existing shareholders and deterring new ones. Such shares typically don't come with voting rights. They will carry a 5% annual dividend that rises to 9% after five years, according to a person familiar with the matter. By investing in several big firms at once, the government hopes to avoid placing a stigma on any one firm for getting government help.
The plan will be structured to encourage firms to bring in private capital. For instance, firms returning capital to the government by 2009 may get better terms for the government's stake, a person familiar with the discussions said.
FDIC Moves
Among the other key components of the plan is the FDIC temporarily guarantee, for a fee, certain types of new debt called senior unsecured debt issued by banks and thrifts. This would apply to debt issued by June 30 with maturities up to three years. One problem plaguing credit markets has been a fear among financial institutions that it is unsafe to lend to each other even for periods of a few days. U.S. officials hope this guarantee removes that fear, which could bring down short-term lending rates, such as the London interbank offered rate, or Libor, a benchmark for consumer and business loans.
The FDIC is also temporarily offering banks unlimited deposit insurance for non-interest bearing bank accounts typically used by small businesses, through 2009. This would be voluntary for banks, and would extend the $250,000 per depositor limit lawmakers agreed on two weeks ago. To use these new powers, the FDIC is invoking a "systemic risk" clause in federal banking law that allows it to take extreme steps to prevent shocks to the economy.
The FDIC's central role in the plan is consistent with its presence during past banking crises, the Great Depression and the savings and loan crisis. Each crisis sparked a major boost in the agency's power.
The shift brings U.S. policy more in line with that of other countries. Monday, the U.K., Germany, France, Spain and Italy provided further details of measures to buy stakes in struggling banks and offer lending guarantees. The U.K., which first formulated such a plan, is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three big banks.
The U.S. plan to inject capital into banks is expected to be open to almost all such institutions, with a focus on getting the participation of the firms most important to the financial system, according to people familiar with the matter. Treasury's main goal is to attract private capital. To make sure private investors aren't scared away, it is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants, these people said.
Officials at the Treasury and Federal Reserve have been looking for a comprehensive approach to the credit crisis after a series of ad hoc interventions and say they didn't have the authority to make such a comprehensive move until Congress passed the bailout bill. The government's various moves, from saving mortgage giants Fannie Mae and Freddie Mac to letting Lehman Brothers Holdings Inc. fail, have confused investors and frozen many in place at a time when the banking system was desperate for fresh capital. That contributed to what in essence was a high-level run on Wall Street banks, with funding drying up overnight.
The government's hope is that the new plan will more thoroughly address the problems of ailing financial institutions and persuade private investors that government involvement won't come at their expense.
For troubled assets there is the Troubled Asset Relief Program, created by the $700 billion bailout bill, which gives the Treasury Department authority to acquire bad assets from banks and other financial institutions. TARP will also be used by Treasury when it puts new equity into banks.
The other steps, including the FDIC's role in guaranteeing new funds raised by banks and thrifts, are designed to address the way banks fund themselves, freeing them to start lending again.
Meanwhile, the Federal Reserve announced that beginning Oct. 27, a new program will be open to fund purchases of commercial paper of three-month maturity from high-quality issuers. It will cease purchasing commercial paper on April 30, unless the program is extended.
Unsecured commercial paper will be priced at the three-month overnight index swap rate plus 100 basis points with an additional 100-basis-point surcharge. Asset-backed commercial paper will be priced at the OIS rate plus 300 basis points.
Libor rates, which are set daily in London, fell in anticipation of Tuesday's announcement. The largest decline was in overnight Libor rates, though one- and three-month rates also fell. Prices of U.S. Treasury bills, which usually benefit from flight-to-quality buying, fell Tuesday -- a sign that investors are willing to take on more risk.
Mr. Bernanke on Tuesday made clear that regulators will keep taking actions until the turmoil in financial markets eases. "We will not stand down until we have achieved our goals of repairing and reforming our financial system and thereby restoring prosperity to our economy," he said.
WSJ
This is mind boggling. The biggest government taking in history. And you have to trust the government that it will sell back the stock! HA!, it will never happen. That stock will become federal property and they will hold it for a 1000 years to come.
To think that solvent bank are actually considering volunteering to let the government take property like this.
Stalin is dancing in his glass crypt....even he had to shoot people in the head to get their cooperation. And here we come volunteering the same...
Shame on you America.
Can't someone sue the government to test the constitutionality of all this.
Where are the "Republicans" when you need one?
posted by madtom at 6:19 PM
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