Feds Vow to Shore Up Banking System

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    NEWSLETTERS

    TK
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    The new program — a crucial component of President Barack Obama's strategy for handling the $700 billion financial bailout — would give the government greater flexibility in dealing with troubled banks.

    NEW YORK -- Federal regulators said Monday they will launch a revamped program to shore up the nation's troubled banks that includes the option of increasing government ownership in financial institutions.

    The new plans are the Obama administration's latest attempt to bolster the strength of the banking system without nationalizing any institutions, which the White House has said it does not intend to do.

    The Treasury Department, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Office of Thrift Supervision and the Federal Reserve jointly issued the statement amid growing concern that some of the country's biggest banks may need additional assistance to survive the fallout from the worst financial crisis since the 1930s.

    The new program — a crucial component of President Barack Obama's strategy for handling the $700 billion financial bailout — would give the government greater flexibility in dealing with troubled banks.

    In a new twist, regulators have the option of allowing the government to boost its ownership in banks without having to pour more taxpayer money into them. That would be done through a technical change converting the status of the government's shares in a financial institution.

    Citigroup Inc. has approached banking 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 to comment Monday afternoon.

    Still, the regulators suggested keeping banks private is a priority.

    "Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption (of the program) is that banks should remain in private hands," the regulators said.

    The new federal program, like the old one, will allow the government to continue to inject more taxpayer money, or capital, into a bank, in an effort to ride out the financial storm. Of the first $350 billion in bailout funds, $250 billion was used to provide capital injections to banks, including Citigroup, Bank of America Corp. and others. But the Obama administration has not said how much of the second $350 billion will be used for that purpose.

    The regulators on Monday did not name any specific banks or respond to reports that the government was considering increasing its ownership of Citigroup.

    The White House just last week downplayed persistent speculation that some banks could be effectively nationalized by the federal government.

    "A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery," the regulators said. "The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses."

    A revamped program, announced by Treasury Secretary Timothy Geithner earlier this month, to plow federal money into banks in return for giving the government ownership stakes will start Wednesday.

    Regulators provided some details on that program Monday.

    "Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory," the regulators said.

    Such a conversion into common stock would give the federal government more control of a bank — without necessarily having to put up more taxpayers' dollars and could be applied retroactively to banks that already have received billions in capital injections. The banks also benefit because preferred shares pay higher dividends so converting them into common shares will help ease their repayment burden.

    Such an option is being considered for Citigroup but also could be available for other banks as well, according to people familiar with the new capital injection program. They spoke on condition of anonymity because they are not authorized to speak for the government.

    When asked about reports that the government was considering increasing its ownership of Citigroup, Treasury spokesman Isaac Baker said the department did not comment on conversations with specific banks.

    "We've made clear that we will do what is necessary to strengthen and stabilize the financial system so that it can provide the credit necessary to support economic recovery," Baker said in a statement.

    The government is open to considering a request to convert preferred shares purchased as part of its $700 billion rescue program into common stock "if the institution and its regulator believe it would promote the long term stability of that institution and we believe it's in the best interest of long term stability of our economy and financial system," Baker said.

    The Wall Street Journal reported late Sunday that Citigroup was in talks with federal officials over the possibility of the government expanding its ownership of the struggling bank to as much as 40 percent of its common stock. The newspaper said bank executives hope the stake will be closer to 25 percent.

    Shares of Citigroup added 18 cents, or 9.2 percent, to $2.13 in Monday afternoon trading. The New York company's stock has traded between $1.61 and $27.35 in the past year.

    The new capital injection program will require banks to under go "stress tests" to examine their financial health and determine whether additional capital is needed. Details on how these tests will work may be provided Wednesday, the people familiar with the plan said.

    "Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized," the regulators said. However, as part of the stress tests, banking examiners will be looking closely at both the quality and quantity of capital.

    Also Monday, Geithner will join Obama and other guests at a fiscal responsibility summit at the White House to discuss how to curb a burgeoning federal deficit laden with Social Security, Medicare and Medicaid obligations.