Devil Is in Bailout's Details
Upending the government's relationship with the financial sector, the Bush administration outlined a plan Tuesday to prop up banks by injecting $250 billion into U.S. financial institutions, including nine of the nation's largest banks, and to guarantee new debt issues and deposit accounts used by businesses.
The sweeping steps create a thicket of issues, most pressingly whether the banks will step up lending. The government is making clear it expects banks to lend out the funds it gets from Uncle Sam. Further exercising its clout, Treasury also extracted a promise that the financial firms would help struggling homeowners, continue lending and would sign up for loan guarantees offered by the Federal Deposit Insurance Corp.
"What we're doing is making clear to the banks how important it is to deploy the capital," Treasury Secretary Henry Paulson said in an interview.
Analysts, investors and some bankers applauded the government rescue. They said it would help rebuild confidence in the industry and could set the stage for a wave of consolidation in which stronger companies take over their weaker rivals.
Officials with some of the giant banks, whose CEOs were briefed Monday on the government's plan, said they don't expect that the government's new role as a major shareholder will subject them to additional regulatory restrictions. They noted that top banks already face rigorous scrutiny, with bank regulators permanently stationed at their headquarters.
"Believe me, they have plenty of influence already," said a top executive at a major New York bank, brushing off questions about whether his company will see tougher supervision.
Bank of America Corp. Chairman and Chief Executive Officer Kenneth Lewis was supportive of the new plan, while acknowledging that some conditions for the government help were not ideal. "Our interest is in anything that helps the system operate more normally at this point," said Bank of America spokesman Robert Stickler. As for the possibility of government interference, "Who knows?" he said. "We are in unchartered territory."
Edward J. Wehmer, chief executive of Wintrust Financial Corp., a bank-holding company in Lake Forest, Ill., said the government financing is likely to attract smaller banks that haven't been able to raise new capital at reasonable prices. "The market was becoming very predatory with the private-equity guys," Mr. Wehmer said. "You basically had to sell your soul."
The Treasury Department said it intended to remain a passive investor in the financial institutions that get government cash. But its tentacles will influence aspects of how banks do business, by placing restrictions on dividend payments, executive compensation and the types of private investments that banks can receive.
In somber remarks in the Treasury Department's ornate Cash Room, Mr. Paulson said the government's latest moves were necessary given the deep financial crisis.
While he had been reluctant to take such steps, his actions Tuesday, coupled with the administration's moves over the past six months, have injected the government more deeply into the financial sector than at any time since the 1930s. Mr. Paulson and other regulators said the steps were temporary.
But, historically, it's often hard to undo new rules in Washington after businesses, consumers and policy makers adjust to changes.
Mr. Paulson said the government was not seeking an active role in the companies where it invests. "We're not looking to come in and take meaningful ownership percentages," he said. "We're looking to put in place a very good private-sector money manager to manage these equities to be sold."
At the core of Tuesday's announcement is a plan to buy $250 billion of preferred stock in banks, a step the government sees as crucial to getting banks to make new loans and to lure private capital from the sidelines.
Source: WSJ
The sweeping steps create a thicket of issues, most pressingly whether the banks will step up lending. The government is making clear it expects banks to lend out the funds it gets from Uncle Sam. Further exercising its clout, Treasury also extracted a promise that the financial firms would help struggling homeowners, continue lending and would sign up for loan guarantees offered by the Federal Deposit Insurance Corp.
"What we're doing is making clear to the banks how important it is to deploy the capital," Treasury Secretary Henry Paulson said in an interview.
Analysts, investors and some bankers applauded the government rescue. They said it would help rebuild confidence in the industry and could set the stage for a wave of consolidation in which stronger companies take over their weaker rivals.
Officials with some of the giant banks, whose CEOs were briefed Monday on the government's plan, said they don't expect that the government's new role as a major shareholder will subject them to additional regulatory restrictions. They noted that top banks already face rigorous scrutiny, with bank regulators permanently stationed at their headquarters.
"Believe me, they have plenty of influence already," said a top executive at a major New York bank, brushing off questions about whether his company will see tougher supervision.
Bank of America Corp. Chairman and Chief Executive Officer Kenneth Lewis was supportive of the new plan, while acknowledging that some conditions for the government help were not ideal. "Our interest is in anything that helps the system operate more normally at this point," said Bank of America spokesman Robert Stickler. As for the possibility of government interference, "Who knows?" he said. "We are in unchartered territory."
Edward J. Wehmer, chief executive of Wintrust Financial Corp., a bank-holding company in Lake Forest, Ill., said the government financing is likely to attract smaller banks that haven't been able to raise new capital at reasonable prices. "The market was becoming very predatory with the private-equity guys," Mr. Wehmer said. "You basically had to sell your soul."
The Treasury Department said it intended to remain a passive investor in the financial institutions that get government cash. But its tentacles will influence aspects of how banks do business, by placing restrictions on dividend payments, executive compensation and the types of private investments that banks can receive.
In somber remarks in the Treasury Department's ornate Cash Room, Mr. Paulson said the government's latest moves were necessary given the deep financial crisis.
While he had been reluctant to take such steps, his actions Tuesday, coupled with the administration's moves over the past six months, have injected the government more deeply into the financial sector than at any time since the 1930s. Mr. Paulson and other regulators said the steps were temporary.
But, historically, it's often hard to undo new rules in Washington after businesses, consumers and policy makers adjust to changes.
Mr. Paulson said the government was not seeking an active role in the companies where it invests. "We're not looking to come in and take meaningful ownership percentages," he said. "We're looking to put in place a very good private-sector money manager to manage these equities to be sold."
At the core of Tuesday's announcement is a plan to buy $250 billion of preferred stock in banks, a step the government sees as crucial to getting banks to make new loans and to lure private capital from the sidelines.
Source: WSJ
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