Treasury Invokes Patriotism In Pitch to Bank Executives
Tuesday, October 14, 2008
The federal government is renewing its attempt to persuade people to give money to banks, and banks to give money to people.
In its most sweeping gesture, yet, the government compelled the chief executives of nine major banks to sell taxpayers an ownership stake in their companies. The investment is heavily symbolic. It is meant to assure the world that the American financial system is open for business. It is also intensely practical. It is intended to encourage many of the nation's 8,500 smaller banks to ask for the money they need, but cannot get anywhere else, to rebuild their reserves and increase their lending to people and businesses.
The government will spend $250 billion on this program, but that's not nearly enough money to restart the banking system. So officials also are introducing two new programs to persuade others to give money to the banking system as well.
The Federal Deposit Insurance Corp. plans to announce that it is expanding its guarantee of deposits to include essentially all the bank accounts of the nation's small businesses. The agency also will create a parallel insurance program to guarantee investments in debt issued by banks.
Because the financial system depends heavily on confidence, the government's response is aimed at repairing perceptions as well as problems. For that reason, the government ordered the chief executives of nine prominent banks to attend a meeting yesterday at the imposing offices of the Treasury Department, next-door to the White House.
The participants included: Bank of America, J.P. Morgan Chase and Wells Fargo, retail banking giants that together control 30 percent of the nation's deposits; Wall Street titans Goldman Sachs, Morgan Stanley and Merrill Lynch, which has agreed to be bought by Bank of America; and Citigroup, the most international of the American banks. Also invited were the Bank of New York Mellon and State Street, lesser-known banks that play a crucial role as the back offices for the financial system.
Treasury Secretary Henry M. Paulson Jr. told the executives that for the good of the nation -- patriotism was specifically invoked, according to a person briefed on the discussions -- they would each have to sell the government a stake in their companies.
Representatives of several banks underscored after the meeting that they did not need the government's money but said they cooperated out of obligation and to help heal the financial system.
The government will invest $125 billion in the nine banks, and then it will make another $125 billion available to the 8,500 smaller banks, which can choose whether to participate. Banks that accept the investments -- as the big nine must -- will issue to the government preferred shares of stock, meaning that the shares will pay annual interest. That has the effect of immediately reducing the value of existing shares and of limiting the companies' future profits, by directing some of their revenues to the government.
The preferred shares also are designed to encourage companies to repay the government within three years. During the first three years, companies will pay 5 percent interest on the government's investment. After that, if the companies do not repurchase the preferred shares, the annual interest rate climbs to 10 percent.
The government will not run the companies. Its investment varies case by case: Citigroup and J.P. Morgan Chase will receive $25 billion each; Bank of America and Wells Fargo, $20 billion; Goldman Sachs and Morgan Stanley, $10 billion, Bank of New York and State Street $2 billion to 3 billion. Wells Fargo will get an additional $5 billion, for its purchase of Wachovia, and Bank of America gets the same for Merrill Lynch.