Federal regulators vowed Monday to assist struggling banks by increasing the government's ownership stakes while an Obama spokesman said the president supports a private banking system. A financial reporter discusses the deepening crisis amid large market losses.
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Federal regulators today promised to prop up struggling banks and possibly even take greater ownership stakes in them. But a White House spokesman said President Obama still supports a private banking system.
At the same time, Citigroup was widely reported to be asking the government to raise its equity stake in the company.
On Wall Street, bank stocks were up, but overall the market retreated to 11-year lows. The Dow Jones Industrial Average lost 250 points to close at 7,114. The Nasdaq fell 53 points to close at 1,387.
For more on our lead story, I'm joined by Krishna Guha, U.S. economics editor for the Financial Times.
Thank you for joining us tonight. What do we know about what it is that these banks may be asking of the federal government and what the federal government is prepared to do?
KRISHNA GUHA, Financial Times:
Well, the federal government is laying out a framework here that could lead to it taking significant shareholdings in a large number of banks. They don't want that to happen; they would prefer it didn't; and they hope that, by offering more support, they'll make this less likely.
But here's their plan. They want to stress test the banks, see what would happen if the economy got even worse than it is today. Based on those stress tests, they'll find out how much capital banks might need to survive these rocky scenarios.
The government is saying, if no one else will make funds available to you, we'll put up some capital that can convert into equity. In theory, it would be up to the banks to ask for that. But in practice, the regulators could probably cram it down their throats.
Is Citigroup the only bank that we know of that's considering this approach?
So, City is — they're actually asking the government to take a large shareholding in it. Executives think that's the only way to shore up market confidence in the bank.
At the moment, the government has what's called preferred shares in Citigroup, as it has in a lot of the other banks. These are non-voting stocks. They carry a fixed interest rate. Investors think it's not quite as good as having common equity. That's normal shares for normal people.
So the executives at Citi are saying, "Come in. Become a large shareholder in our bank, perhaps even as much as a 40 percent stake in Citigroup." It's a sign of how far we've moved.