Expanded Rescue Of Banks Outlined

President Obama called for stronger regulation of the financial sector Wednesday, unveiling principles that will guide development of new rules for banks during the next four weeks. Video by AP
By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, February 26, 2009

The Obama administration yesterday detailed its expanded aid plan for the banking industry, laying the groundwork for the government to take large ownership stakes in the most troubled banks and giving other banks up to seven years to repay taxpayers.

President Obama said Tuesday night that the goal was to increase lending and restore investor confidence. Obama said the expanded rescue probably will cost more than the $700 billion already approved by Congress.

Federal regulators yesterday launched "stress tests" of 19 of the largest banks to determine how much more money they will need. The results are expected no later than the end of April. Banks then will have six months to raise the money from private investors or accept federal aid.

Although the administration says it is determined not to seize control of large banks, Federal Reserve Chairman Ben S. Bernanke said the government may take "a substantial minority share" in Citigroup and other troubled banks that can't get money anywhere else.

Even as his administration moved to end the current crisis, Obama yesterday described principles for a vast revamp of financial regulation, signaling that the government would oversee a much wider range of financial activity and take a stronger hand in doing so.

"While free markets are the key to our progress, they do not give us free license to take whatever we can get, however we can get it," the president said. "Strong financial markets require clear rules of the road, not to hinder financial institutions but to protect consumers and investors."

Speaking after a meeting with key lawmakers and senior advisers, Obama said the government needs to overhaul the frayed patchwork of regulatory agencies that oversee the financial industry. He expressed support for increased consumer protections. And he indicated that he favored empowering the Federal Reserve as a regulator of systemic risk, with authority over any financial firm or instrument that could destabilize the economy.

The administration hopes to present a more detailed plan for regulatory reform by early April, when leaders of the wealthiest nations are scheduled to meet in London.

By then, the depth of its plunge into the banking industry may be more clear.

Retail giants such as Bank of America, investment banks such as Morgan Stanley and specialty banks such as State Street are all now required to measure its likely losses in the event that the economy gets much worse.

Officials said yesterday that the tests will assume that the unemployment rate reaches 10.3 percent by the end of 2010 -- the January rate was 7.6 percent -- and that average home prices would decline 47 percent from the peak of the housing bubble, compared with a 27 percent decline so far. The test will also assume that economic activity as measured by gross domestic product shrinks by 3.3 percent this year before recovering slightly in 2010.

Regulators have calculated that there is roughly a 10 percent chance that economic conditions would reach this extreme of deterioration. The parameters were based on a consensus of economic forecasts, though some prominent economists said the government should test an even more catastrophic scenario.

CONTINUED     1        >

© 2009 The Washington Post Company