TOPICS > Economy

Regulators Move to Revamp Program to Boost Troubled Banks

BY Admin  February 23, 2009 at 1:35 PM EDT

Citibank location; AP file photo

The White House has said President Barack Obama favors a
privately held banking system, and the new plans are the administration’s
latest attempt to improve the strength of the banking system without
nationalizing any institutions.

“Because our economy functions better when financial
institutions are well managed in the private sector, the strong presumption (of
the program) is that banks should remain in private hands,” the regulators
said.

The Federal Deposit Insurance Corp., Treasury Department,
Office of the Comptroller of the Currency, Office of Thrift Supervision and the
Federal Reserve jointly issued the statement amid growing concern that some
large banks may need additional help to survive the fallout from the worst
financial crisis since the 1930s.

The new program, which marks a key component of the Obama
administration’s strategy for handling the $700 billion financial bailout –
would give the government greater flexibility in dealing with troubled banks,
the Associated Press reported.

Among the changes, regulators would have the option to allow
the government to boost ownership in banks without injecting more taxpayer
money into them. That would be done through a technical change converting the
status of the government’s shares in a financial institution, according to
media reports.

The new program, like the old one, would still allow the
government to continue to inject more capital into a bank to help it ride out
the financial storm. Of the first $350 billion in bailout funds, $250 billion
was used to provide capital injections to banks, including Citigroup Inc., Bank
of America Corp. and others. But the Obama administration has not said how much
of the second $350 billion will be used to do that.

“The government will ensure that banks have the capital
and liquidity they need to provide the credit necessary to restore economic
growth. Moreover, we reiterate our determination to preserve the viability of
systemically important financial institutions so that they are able to meet
their commitments,” Monday’s statement read.

In the coming weeks, the Treasury Department is expected to
subject banks with more than $100 billion of assets to “stress tests”
to decide which need capital. Citigroup ended 2008 with $1.95 trillion of
assets.

On Monday, the regulators did not name any specific banks or
respond to reports that the government was considering increasing its ownership
of Citigroup.

The Wall Street Journal reported late Sunday that Citigroup
was in talks with federal officials over the possibility of the government
expanding ownership of the struggling bank to as much as 40 percent of its
common stock. The newspaper said bank executives hope the stake will be closer
to 25 percent.

When asked about reports that the government was considering
increasing its ownership of Citigroup, Treasury spokesman Isaac Baker said the
department did not comment on conversations with specific banks.

“We’ve made clear that we will do what is necessary to
strengthen and stabilize the financial system so that it can provide the credit
necessary to support economic recovery,” Baker said in a statement.

Citigroup, the third-largest U.S. bank by assets, could
convert billions of preferred stock that the government obtained last fall to
common stock.

Shares of Citigroup, which fell below $2 on Friday, rose as
much as 23.1 percent after news of the talks surfaced, and after U.S. bank
regulators said they stood ready to provide more capital to the sector and
“preserve the viability of systemically important financial institutions.”

“Even if shareholders get diluted, as long as the bank
isn’t nationalized there could be tremendous upside,” Ralph Cole, a
portfolio manager at Ferguson Wellman Capital Management in Portland, Ore.,
told Reuters

Citigroup declined to comment on the reported talks with the
government, but in an e-mail said its capital base is very strong, with Tier-1
capital, which measures its ability to cover losses, about twice the required
minimum.