Make us your home page
Instagram

Government shifts strategy in strengthening banks

WASHINGTON — The government on Monday moved toward dramatically expanding its ownership stakes in the nation's banks, with Citigroup, the struggling titan of the industry, apparently at the top of the list.

The Treasury Department, Federal Reserve and other banking regulators said they could convert the government's stock in the banks from preferred shares to common shares.

The strategy, which could be applied retroactively to banks that received money in the first incarnation of the bailout, carries risks. But it avoids, at least for now, having to tap more taxpayer money or resort to full-fledged nationalization.

Meanwhile, the government's boldest rescue to date, a $150 billion commitment for the insurer American International Group, is foundering. AIG indicated Monday it is negotiating for tens of billions of dollars in additional assistance as losses have mounted.

Citigroup — perhaps the biggest name in American banking — has approached the regulators about ways the government could help strengthen the bank, including the stock conversion plan, according to people familiar with the discussions. A Citigroup spokesman declined comment.

Citigroup stock rose about 10 percent Monday, its first gain in eight days.

The stock conversion could be available for other banks as well, said the same sources, who spoke to the Associated Press on the condition of anonymity because the discussions are ongoing.

Regulators, reinforcing what the White House has said, insisted keeping banks private is a priority. But federal officials are walking a difficult line because the government could still have huge stakes in banks.

Citigroup already has received $45 billion in bailout money, plus guarantees to cover losses on hundreds of billions of dollars in risky investments.

"What we are doing here is we're creeping our way toward nationalization," said Terry Connelly, dean of Golden Gate University's Ageno School of Business.

The conversion plan would give the government greater flexibility in dealing with ailing banks. It would give the government voting shares and more say in a bank's operations.

But common shares absorb losses before preferred shares do, which means taxpayers would be on the hook if banks keep writing down billions of dollars' worth of rotten assets, such as dodgy mortgages, as many analysts expect they will.

On the other hand, common stock in banks is incredibly cheap, and taxpayers would reap gains if the banks come back to health and the stock price goes up.

It is also far from clear whether the Obama plan would entice private companies to step forward and invest in banks.

The conversion plan would eliminate the 5 percent dividend that banks already receiving bailout money are currently paying the government on its preferred shares, allowing the banks to hold on to more cash.

It also could bring banks closer to the mix of capital that the government will want to see when it starts conducting its "stress tests" on Wednesday to determine the health of banks, experts said.

Government shifts strategy in strengthening banks 02/23/09 [Last modified: Monday, February 23, 2009 11:11pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Associated Press.
    

Join the discussion: Click to view comments, add yours

Loading...
  1. Federal agencies demand records from SeaWorld theme park

    Tourism

    ORLANDO — Two federal agencies are reportedly demanding financial records from SeaWorld.

    Killer whales Ikaika and Corky participate in behaviors commonly done in the wild during SeaWorld's Killer Whale educational presentation in this photo from Jan. 9. SeaWorld has been subpoenaed by two federal agencies for comments that executives and the company made in August 2014 about the impact from the "Blackfish" documentary. 
[Nelvin C. Cepeda/San Diego Union-Tribune/TNS]
  2. Legalized medical marijuana signed into law by Rick Scott

    State Roundup

    TALLAHASSEE — Gov. Rick Scott on Friday signed into law a broader medical marijuana system for the state, following through on a promise he made earlier this month.

    Gov. Rick Scott signed legislation on Friday that legalizes medical marijuana in Florida.
  3. Line of moms welcome Once Upon A Child to Carrollwood

    Business

    CARROLLWOOD — Strollers of all shapes and sizes are lined up in front of the store, and inside, there are racks of children's clothing in every color of the rainbow.

    At Once Upon A Child, you often as many baby strollers outside as you find baby furniture and accessories. It recently opened this location in Carrollwood. Photo by Danielle Hauser
  4. Pastries N Chaat brings North India cuisine to North Tampa

    Business

    TAMPA — Pastries N Chaat, a new restaurant offering Indian street food, opened this week near the University of South Florida.

    The menu at Pastries N Chaat includes a large variety of Biriyani, an entree owners say is beloved by millions. Photo courtesy of Pastries N Chaat.
  5. 'Garbage juice' seen as threat to drinking water in Florida Panhandle county

    Water

    To Waste Management, the nation's largest handler of garbage, the liquid that winds up at the bottom of a landfill is called "leachate," and it can safely be disposed of in a well that's 4,200 feet deep.

    Three samples that were displayed by Jackson County NAACP President Ronstance Pittman at a public meeting on Waste Management's deep well injection proposal. The sample on the left is full of leachate from the Jackson County landfill, the stuff that would be injected into the well. The sample on the right shows leachate after it's been treated at a wastewater treatment plant. The one in the middle is tap water.