Treasury Weighs Investing In Banks

Treasury Secretary Paulson has to work out critical issues in a plan to take an ownership stake in banks, such as how many institutions should be included.
Treasury Secretary Paulson has to work out critical issues in a plan to take an ownership stake in banks, such as how many institutions should be included. (By Win Mcnamee -- Getty Images)
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By David Cho, Binyamin Appelbaum and Lori Montgomery
Washington Post Staff Writers
Friday, October 10, 2008

The Bush administration is hammering out the final details of a plan that would allow the government to inject cash into banks in exchange for ownership stakes in an effort to shore up confidence in the faltering financial system, according to officials and sources who have been in contact with the Treasury Department.

Senior Treasury officials think they have the authority to take ownership stakes in banks under the $700 billion rescue package that was passed by Congress and signed into law last week, the sources said. But the administration has yet to work out several critical issues, such as how many banks should be included and when the plan should be put into effect.

The Treasury is expected to announce the plan by the end of the month or even sooner, the sources said, speaking on condition of anonymity because their conversations with the agency were private. Congressional leaders could be briefed as early as today.

The proposal already is generating controversy on Capitol Hill and among private-sector firms concerned that a broad intervention of this kind would represent a vote of no-confidence in the entire banking industry, not just troubled institutions.

White House press secretary Dana Perino suggested yesterday that President Bush would support a government move to buy shares in troubled U.S. banks if Treasury Secretary Henry M. Paulson Jr. decided to do so.

"It was a part of the rescue package that the president supported, and it gives the Treasury secretary a range of possibilities, and investing in banks directly was one of those authorities," Perino said. "Secretary Paulson can use that authority as he sees fit."

Unlike in the case of American International Group, which had to surrender an 80 percent stake in order to secure a massive government loan, Treasury officials are considering taking non-controlling equity stakes in banks that accept the cash infusions, probably in the range of 10 or 15 percent, the sources said.

What is less clear is what strings would be attached, particularly regarding the compensation of top executives at participating banks.

Under the law, any financial institution that accepts taxpayer money would be required to place limits on executive paychecks. But companies that receive a direct infusion of funds and do not participate in auctions would be subject to far more severe restrictions.

In those cases, the law says the Treasury must establish "appropriate standards" for corporate governance and compensation of the top five executives that would be in effect for as long as the Treasury holds the firm's assets or stocks. Those standards must include a ban on incentives for taking "excessive risks," a method to revoke bonuses paid for profits that never materialize and a ban on "golden parachute" payments for departing executives.

These provisions were among the last to be settled during negotiations between lawmakers and Paulson, who was resistant to placing limits on executive pay.

Because the Treasury has yet to finalize details, it's difficult to say which standard would apply. Treasury officials think banks that participate could avoid the strictest limits on executive pay.

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