Banks Interested in Deal, Paulson Says

By Peter Whoriskey
Washington Post Staff Writer
Tuesday, October 21, 2008

The federal proposal to invest $250 billion in financial institutions has drawn ''interest from a broad group of banks of all sizes,'' Treasury Secretary Henry M. Paulson Jr. said yesterday.

His comments at a Treasury Department news briefing came after community bank executives around the country expressed dismay last week about the emergency program, saying they were not interested in the government's money and resented the intrusion.

Treasury officials emphasized yesterday that they have allocated enough money to cover every eligible institution. The amount of federal money a bank may receive under the program is limited to 3 percent of the institution's "risk-weighted" assets, a measure of the bank's holdings.

The next major challenge for the program is deciding which banks will be allowed to participate. Treasury has said repeatedly that it only wants to invest in ''healthy'' banks that are well-positioned to use the federal money to issue new loans. It does not want to invest in troubled banks that will only use the money for internal purposes.

''While many banks have suffered significant losses during this period of market turmoil, many others have plenty of capital to get through this period, but are not positioned to lend as widely as is necessary to support the economy,'' Paulson said. ''This program is designed to attract broad participation by healthy institutions.''

Treasury officials also said they did not foresee the multi-billion dollar program costing the U.S. government any money.

''This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything,'' Paulson said.

In creating the program, Treasury officials grappled with the problem of how to make it attractive enough to get banks to participate, yet lean enough to protect taxpayers' dollars.

The deal the government is proposing for banks is essentially this: In exchange for the government investment, the participating banks will offer the government preferred shares, which will pay 5 percent annually for the first five years. This interest rate is significantly lower than the prevailing rate of 8 to 10 percent for similar deals, Treasury officials said.

Each participating bank will also give the government the right to buy common shares later.

And the proposed deal requires participating institutions to impose limits on executive pay, although a senior federal regulator today said, ''I think you'll find that the constraints on the preferred shares are not really constraints.''

''I think there is enormous incentive [for the banks to participate],'' said a senior Treasury official, who was not authorized by the department to be quoted by name. "There are good lending opportunities.''

While critics have charged that the investments mean the government will rescue any of the banks it has invested in, potentially costing the government more money and creating a "moral hazard," officials rejected the idea that these banks will automatically be protected against failure.

''I don't think an investment says anything about whether a bank will be allowed to fail,'' a senior Treasury official said.

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