Interest Rate Roundup

Tuesday, February 24, 2009

Nationalization chatter turned up a notch as banking bailout plans morph ... again

The bank nationalization chatter continues to increase in volume. Meanwhile, the government's bank bailout plans continue to morph in form and scope. The latest development? The government is moving toward converting preferred share stakes in banks into common shares. More about the process comes from the Washington Post below ...

"The change paves a road toward nationalization for the most troubled large banks. The government this week will begin a series of "stress tests" on 20 of the largest banks with $100 billion in assets to determine how much more capital these firms need to withstand an extreme recession.

"Companies deemed to need more money will be required to raise it from private sources, or else accept additional government investments. If those investments are converted into common shares, even a relatively modest infusion of taxpayer money could give the government majority control of many banks because their stock prices have plummeted in recent months. The total value of Citigroup's outstanding shares, for instance, is less than $12 billion.

"Administration officials said the goal of the revised program is to give banks a short-term boost that avoids the need for a more dramatic federal intervention.

"What Treasury Secretary Timothy F. Geithner and his team want to avoid is an explicit takeover that would put the government in charge of running banks. But some senior officials have said that, as a last resort, they would consider taking temporary control of large banks. The government also could take a majority ownership stake in a company without attempting to manage its daily operations.

Some more background on what's been done to date follows later in the story ...

"The government has invested almost $200 billion in more than 400 banks under a program created by former Treasury Secretary Henry M. Paulson Jr. In exchange, the government received shares of preferred stock that paid an annual interest rate of 5 percent for five years.

"The changes announced yesterday create a two-step process, officials said. Companies can replace the government's preferred shares with a new kind of preferred shares that will differ in at least one critical respect -- they can be converted into shares of the company's common stock. The company can request the conversion at any point during a specified period of several years, or else the shares will begin to gradually convert into common shares over time. If the company does not want to issue common shares to the government, it must buy back the government's preferred shares before the end of the period. Conversions will require the approval of banking regulators with final approval from the Treasury Department, a senior administration official said."

This Bloomberg story gives some more background on where things stand, as well.


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