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US govt eyes stakes in 9 top financial institutions

Source: PTI
October 14, 2008 12:23 IST
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The United States is expected to inject $250 billion to shore up the banking system and take stakes in nine top financial institutions, media reports said on Tuesday.

The details are expected to be announced on Tuesday (around 1800 hrs IST) but the Wall Street Journal identified the institutions as Goldman Sachs Group, Morgan Stanley, J P Moran Chase and Co, Bank of America, including soon to be acquired Merill Lynch, Citigroup, Walls Fargo and Co, Bank of New York Mellon and State Street Corp.

The government is set to buy preferred equity stakes in these institutions.

Some of the big banks, the Journal said, were unhappy about the government taking equity stakes, but acquiesced under pressure from Treasury Secretary Henry Paulson in a meeting on 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, the paper said.

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.

Other elements of the plan include equity investments in possibly thousands of other banks; lifting the cap on deposit insurance for certain bank accounts, such as those used by small businesses; and guaranteeing certain types of bank lending.

It builds on an earlier plan to buy up rotten assets dragging down banks, which failed to calm investor fears, and follows similar moves by major European countries, the paper said.

Formulated jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp, these moves 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 most likely tipped the economy into recession and caused stocks to crater last week.

Along with the government's involvement, the report said, 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, the Journal said.

A central plank of these new efforts is a plan for the Treasury to take about $250 billion in equity stakes in potentially thousands of banks, according to people familiar with the matter, using funds approved by Congress through the recently approved $700 billion bailout plan.

Treasury, the Journal said, will buy $25 billion in preferred stock in Bank of America -- including Merrill Lynch -- as well as JP 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 per cent annual dividend that rises to 9 per cent after five years, the Journal said citing a person familiar with the matter.

Among the other key components of the plan: The FDIC is expected to offer temporary 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 is a fear among financial institutions that it is unsafe to lend to each other even for periods of few days, the paper said.

US 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 expected to temporarily offer 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 upon two weeks ago.

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