Expanded Rescue Of Banks Outlined

Video

Obama Lays Out Financial Regulation Plan

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

» LAUNCH VIDEO PLAYER

Banks required to accept government money must issue preferred shares that pay annual interest of 9 percent. That is higher than the 5 percent interest rate on the government's existing investments of almost $200 billion in more than 400 banks. The government had been criticized for investing money at below-market rates, in effect creating an undisclosed subsidy worth tens of billions of dollars.

The new shares differ in another key respect: They can be converted into common shares, which carry ownership rights.

The shares convert automatically if banks do not repay the government in seven years, but banks can also opt to make the conversion sooner.

Citigroup already is negotiating with the government for permission to do this because of an important accounting advantage: In calculating how much money banks hold in their capital reserve against future losses, many investors include only money raised through the sale of common shares.

The government is hoping that investors will treat the right to convert the shares as though the institutions had actually been given more capital. If institutions are forced to convert their shares to appease investors, the government could quickly become the majority owner of those banks.

The goal of the plan is to restore investor confidence in banks, attracting new private investments that would allow companies to repay the government.

But the details were panned yesterday by some investors, who warned that the plan leaves the banks shrouded in uncertainty because it won't be clear for six months which ones need government money, and it might not be clear for seven years how much of an ownership stake the government eventually will take.

Dan Alpert, managing director of Westwood Capital, said the government should immediately take an 80 percent stake in banks that need federal aid, the maximum stake the government can take without being forced to put a company on the federal balance sheet.

Knowing the worst already had happened, he said, would give private investors the confidence to commit their own money. "The government needs to come in and say: 'You are going to be saved. We'll fund you. We'll keep you alive. And at the very start, this is all of the dilution we're ever going to do,' " Alpert said.

Anything short of that, he said, is not likely to work.

Staff writers Zachary A. Goldfarb, Neil Irwin and Michael D. Shear contributed to this report.