Treasury Weighs
Investing In Banks
Ownership Stake Details Discussed
By David Cho, Binyamin Appelbaum and Lori
Montgomery
Washington Post Staff Writers
Friday, October 10, 2008;
D01
The Bush administration is hammering out the final details of a plan that
would allow the government to inject cash into banks in exchange for ownership
stakes in an effort to shore up confidence in the faltering financial system,
according to officials and sources who have been in contact with the Treasury Department.
Senior Treasury officials think they have the authority to take ownership
stakes in banks under the $700 billion rescue package that was passed by
Congress and signed into law last week, the sources said. But the administration
has yet to work out several critical issues, such as how many banks should be
included and when the plan should be put into effect.
The Treasury is expected to announce the plan by the end of the month or even
sooner, the sources said, speaking on condition of anonymity because their
conversations with the agency were private. Congressional leaders could be
briefed as early as today.
The proposal already is generating controversy on Capitol Hill and among private-sector firms concerned that a broad
intervention of this kind would represent a vote of no-confidence in the entire
banking industry, not just troubled institutions.
White House press secretary Dana Perino suggested yesterday that President Bush would support a government move to buy shares in
troubled U.S. banks if Treasury Secretary Henry M. Paulson Jr. decided to do so.
"It was a part of the rescue package that the president supported, and it
gives the Treasury secretary a range of possibilities, and investing in banks
directly was one of those authorities," Perino said. "Secretary Paulson can use
that authority as he sees fit."
Unlike in the case of American International Group, which had to surrender an 80 percent
stake in order to secure a massive government loan, Treasury officials are
considering taking non-controlling equity stakes in banks that accept the cash
infusions, probably in the range of 10 or 15 percent, the sources said.
What is less clear is what strings would be attached, particularly regarding
the compensation of top executives at participating banks.
Under the law, any financial institution that accepts taxpayer money would be
required to place limits on executive paychecks. But companies that receive a
direct infusion of funds and do not participate in auctions would be subject to
far more severe restrictions.
In those cases, the law says the Treasury must establish "appropriate
standards" for corporate governance and compensation of the top five executives
that would be in effect for as long as the Treasury holds the firm's assets or
stocks. Those standards must include a ban on incentives for taking "excessive
risks," a method to revoke bonuses paid for profits that never materialize and a
ban on "golden parachute" payments for departing executives.
These provisions were among the last to be settled during negotiations
between lawmakers and Paulson, who was resistant to placing limits on executive
pay.
Because the Treasury has yet to finalize details, it's difficult to say which
standard would apply. Treasury officials think banks that participate could
avoid the strictest limits on executive pay.
But key Congressional aides said yesterday that providing direct infusions of
cash would probably trigger the stricter standard.
"My sense is that Treasury would be playing with fire if they think for a
second they can skirt the restrictions in the bill," one aide said, speaking on
condition of anonymity because the details of the plan are not final.
Until now, Treasury officials had indicated that much of the $700 billion
would be used to purchase troubled assets through auctions that force financial
institutions to offer the Treasury the lowest possible price. But the Emergency
Economic Stabilization Act gives Paulson expansive powers to purchase other
kinds of securities, as well.
The law defines troubled assets as mortgages or securities backed by
mortgages in a plummeting housing market, or "any other financial instrument
that the Secretary . . . determines the purchase of which is necessary to
promote financial market stability," including stocks. If Paulson chooses to
apply the more creative definition, he must consult with Federal Reserve Chairman Ben S. Bernanke and notify Congress.
Moments before the House voted last week to approve the measure, lawmakers
discussed their explicit intention to permit Paulson to fund a "capital
infusion."
"This was always intended to be an option. The only question is, when, how
and to what extent," Sen. Charles E. Schumer (D-N.Y.) said in a statement
yesterday.
Many academics and economists have pushed for the government to make direct
capital investments in banks, arguing such a program would be a much more
effective vehicle to encourage new lending than buying up troubled assets.
But the Treasury faces significant difficulties in designing an effective
plan. Experts say recapitalization would only serve to encourage new lending if
the government focuses its investment on healthy banks instead of troubled
ones.
"If it just focuses on troubled institutions, then it's not going to have the
intended effect of reenergizing the credit market," said Campbell Harvey, a Duke University finance professor. "Troubled institutions don't
deserve the capital. You're throwing good money at bad, helping an institution
that might go under anyway."
The banking industry strongly opposes government investment in a large number
of banks. The American Bankers Association, a trade group, yesterday cautioned
the government against a broad plan that might carry the implication that a
large number of American banks need help.
The administration could take a middle road by creating a voluntary program
open to all banks. But experts said that might amount to a public relations
gesture, with few banks stepping forward to participate.
Staff writer Dan Eggen contributed to this report.
© 2008 The
Washington Post Company