Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort
By DEBORAH SOLOMON, DAMIAN PALETTA and JON HILSENRATH (WJS)
WASHINGTON -- The U.S. government is expected to buy stakes in the nation's top financial institutions as part of a wide-ranging effort to restore confidence to the battered banking system, following similar moves by European governments that sent global stock markets soaring.
As part of its new plan, 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., Merrill Lynch, Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street, according to people familiar with the matter.
Not all of the banks involved are happy with the move, but agreed under pressure from the government. All told, the moves tie the banking sector to the federal government for years to come. The comprehensive approach rivals the breadth of the government's response to the Great Depression. As a result, taxpayers now have a direct stake in the future of American finance. Along with the government's involvement come certain restrictions, such as caps on executive pay.
The new plan is designed to bolster bank balance sheets by providing new capital, removing rotten assets and taking new steps to make sure they have access to the funds they use to operate. All told, the moves are designed to get money flowing through the system so that banks will lend to companies, consumers and each other.
The initiatives, which will likely supersede many of the government's previous efforts, are being formulated jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.
One central plank of these new efforts is a plan for the Treasury to take approximately $250 billion in equity stakes in potentially thousands of banks, according to people familiar with the matter, using funds approved by Congress through the $700 billion bailout bill.
Treasury will buy $25 billion in preferred stock in Bank of America, J.P Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman and Morgan Stanley; and between $2 billion and $3 billion in Bank of New York Mellon and State Street. It was unclear whether the Bank of America stake included Merrill, which the bank has a deal to acquire.
The FDIC is expected to temporarily guarantee new debt issued by banks and thrifts for three years. One of the major problems plaguing credit markets in recent weeks has been a fear among financial institutions that it is unsafe to lend to each other even for short periods of a few days. U.S. officials hope this debt guarantee will remove that fear and encourage banks to start lending to each other again. That in turn could bring down some critical short-term lending rates, such as the London interbank offered rate, or Libor, which is a benchmark for many consumer and business loans.
The FDIC is also expected to temporarily offer banks unlimited deposit insurance for non-interest-bearing bank accounts typically used by small businesses. This would be voluntary and extend beyond the $250,000 limit per depositor that lawmakers agreed on two weeks ago. Banks might have to pay an additional fee for the coverage, though details were still being worked out. The shift brings U.S. policy more in line with other countries that rushed to offer blanket deposit insurance to try and prevent customers from withdrawing large sums of money from financial institutions.
All told, the program would put the guarantee of the government behind much of the plumbing of American financial markets, a step that would have appeared inconceivable a few months ago. But the seizure in credit markets and last week's plunging stock markets forced policy makers around the world to shift gears.
Monday, the big European powers -- 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 this 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.K. will also guarantee some £250 billion in bank debts with maturities of up to three years. The guarantees extend to the vast and frozen market for interbank lending, or short-term loans made among banks, a U.K. Treasury spokeswoman said.
The current planning in Washington would bring the U.S. in line with these countries.
Treasury Secretary Henry Paulson has grown increasingly concerned about the worsening situation and wants to aim government dollars directly at bank balance sheets.
Details are still being finalized, but the equity-injection program is expected to be open to almost all banks, with a focus on getting the participation of the firms most important to the financial system, according to people familiar with the matter.
While the Treasury wants to put money into banks, its main goal is to attract private capital. To make sure private investors aren't scared away, the Treasury 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, a move that is designed to not hurt existing shareholders.
Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort
WASHINGTON — NY Times
Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.
The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.
The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.
The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.
This new interest in direct investment in banks comes after yet another tumultuous day in which the Federal Reserve and five other central banks marshaled their combined firepower to cut interest rates but failed to stanch the global financial panic.
In a coordinated action, the central banks reduced their benchmark interest rates by one-half percentage point. On top of that, the Bank of England announced its plan to nationalize part of the British banking system and devote almost $500 billion to guarantee financial transactions between banks.
The coordinated rate cut was unprecedented and surprising. Never before has the Fed issued an announcement on interest rates jointly with another central bank, let alone five other central banks, including the People’s Bank of China.
Yet the world’s markets hardly seemed comforted. Credit markets on Wednesday remained almost as stalled as the day before. Stock prices, which had plunged in Europe and Asia before the announcement, continued to plummet afterward. And stock prices in the United States went on a roller-coaster ride, at the end of which the Dow Jones industrial average was down 189 points, or 2 percent.
The gloomy market response sent policy makers and outside experts on a scramble for additional remedies to stabilize the banks and reassure investors.
There is no shortage of ideas, ranging from the partial nationalization proposal to a guarantee by the Fed of all lending between banks.
Senator John McCain, the Republican presidential candidate, on Wednesday refined his proposal — revealed in a debate with the Democratic nominee, Senator Barack Obama, the night before — to allow millions of Americans to refinance their mortgages with government assistance.
As Washington casts about for Plan B, investors are clamoring for the Fed to lower interest rates to nearly zero. Some are also calling for governments worldwide to provide another round of economic stimulus through expensive public works projects.
Yet behind the scramble for solutions lies a hard reality: the financial crisis has mutated into a global downturn that economists warn will be painful and protracted, and for which there is no quick cure.
“Everyone is conditioned to getting instant relief from the medicine, and that is unrealistic,” said Allen Sinai, president of Decision Economics, a forecasting firm in Lexington, Mass. “As hard as it is for investors and jobholders and politicians in an election year, this crisis will not end without a lot more pain.”
One concern about the Treasury’s bailout plan is that it calls for limits on executive pay when capital is directly injected into a bank. The law directs Treasury officials to write compensation standards that would discourage executives from taking “unnecessary and excessive risks” and that would allow the government to recover any bonus pay that is based on stated earnings that turn out to be inaccurate. In addition, any bank in which the Treasury holds a stake would be barred from paying its chief executive a “golden parachute” package.
Treasury officials worry that aggressive government purchases, if not done properly, could alarm bank shareholders by appearing to be punitive or could be interpreted by the market as a sign that target banks were failing.
At a news conference on Wednesday, the Treasury secretary, Henry M. Paulson Jr., pointedly named the Treasury’s new authority to inject capital into institutions as the first in a list of new powers included in the bailout law.
Jakarta, 30 August 2008.
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Number of Credit Card BNI Up 14%.
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For more information, contact:
Intan Abdams Katoppo, Corporate Secretary of BNI
Tel: 021-5728387 Fax: 021-5728053, Email: email@example.com