U.S. Forces Nine Major Banks To Accept Partial Nationalization
By David Cho, Neil Irwin and Peter Whoriskey
Washington Post Staff WritersTuesday, October 14, 2008
The
U.S. government is dramatically escalating its response to the
financial crisis by planning to invest $250 billion in the country's
banks, forcing nine of the largest to accept a Treasury stake in what
amounts to a partial nationalization.
News
that European governments also planned to take stakes in their banks
and anticipation of new U.S. measures unleashed a tremendous surge in
U.S. stock prices yesterday, with the Dow Jones industrial average soaring
to the biggest percentage gain since the 1930s, up 11.1 percent. It
ended 936.42 points higher, the largest point gain ever, just days after
the Dow had its steepest weekly decline in history.
The
Treasury Department's decision to take equity stakes in banks
represents a significant reversal, coming just weeks after Treasury
Secretary Henry M. Paulson Jr. had opposed the idea. In a momentous
meeting yesterday afternoon in Washington, Paulson, flanked by top
financial regulators, told the executives of nine leading banks that
they needed to participate in the program for the good of the national
economy, two industry sources said on condition of anonymity because
they were not authorized to speak publicly.
The
government's initiative, which was to be announced this morning before
the markets open for New York trading, is part of a wider plan that goes
beyond the $700 billion rescue package approved by Congress earlier
this month. The Federal Deposit Insurance Corp. is also set to announce
today the launch of an insurance fund to guarantee new issues of bank
debt. It will provide unlimited deposit insurance for
non-interest-bearing accounts, which are widely used by small businesses
for payroll and other purposes.
In
pressing the bank executives to accept partial government ownership,
Paulson's message was clear: Though officially the program was
voluntary, the banks had little choice in the matter. In exchange for
giving the Treasury minority stakes, the nine firms would jointly
receive an investment worth $125 billion. The government would make
another $125 billion available for the next 30 days to thousands of
other banks and thrifts across the country.
Federal officials set
conditions, telling the banks they could not raise their dividends
without government permission and could not offer their executives new
retirement packages, though the old packages would remain intact.
Paulson
told them the moves would shore up confidence in their own
institutions, spark lending throughout the system and send a message to
smaller institutions that there is no stigma in accepting federal
funding. Though some were reluctant, all of the executives complied.
There
is a risk that banks will take the new government capital and use it to
bolster their balance sheets but still not resume lending, and the
Treasury is not getting any specific contractual guarantee to prevent
that from happening. But bank regulators, particularly the Federal
Reserve, will lean heavily on the firms receiving infusions to use the
capital to increase their lending to businesses and consumers.
Taken
together, the steps planned by the Treasury, the FDIC and the Federal
Reserve amount to a monumental effort to jump-start the business of
lending, which all but dried up in recent weeks as banks have lost faith
in one another and their customers. Global markets began to melt down.
Some emerging nations teetered on the brink of financial collapse.
Over
the weekend, global leaders agreed in meetings in Washington to launch a
coordinated program of injecting cash into the world's banks and
guaranteeing their debt. The action by U.S. officials yesterday
represented the U.S. version of those broad principles, and it was
matched by similar efforts in Europe yesterday.
As
part of the effort to flood the financial system with cash, the Federal
Reserve made unlimited funds available early yesterday to other major
central banks so they could inject money into banks in their countries
and ease the shortage of dollars they face. Previously, the Fed's
program of lending dollars to the European Central Bank, Bank of
England, Bank of Japan and others had been capped at a total of $380
billion.
Under the rescue legislation signed into law earlier this month, the Treasury is allowed to take equity stakes in banks.
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