business

By EDMUND L. ANDREWS

The Obama administration put the nation’s biggest banks on notice Monday that the government could become their biggest shareholder if regulators decide they are not strong enough to weather a deeper-than-expected downturn in the economy.In an unexpectedly assertive joint statement, the Treasury Department, Federal Reserve and federal bank regulatory agencies announced that the government might end up demanding a direct ownership stake in major banks after they undergo a tough evaluation of their strength, which is to begin shortly.

“The capital needs of major U.S. banking institutions will be evaluated under a more challenging economic environment,” the administration said. “Should that assessment indicate that an additional capital buffer is warranted,” it continued, the banks could be required to give the government a right to acquire common shares, with voting rights.

The statement came as federal regulators confirmed that they were in discussions with Citigroup over precisely that kind of swap. Citigroup, which has received $45 billion in direct assistance and given the Treasury nonvoting preferred shares that pay a guaranteed dividend — is negotiating to swap the preferred shares for common shares that would give the government a stake as high as 40 percent.

Administration officials said Citigroup had initiated the talks with federal regulators, and the new statement stopped well short of declaring that regulators were ready to partly or wholly “nationalize” any major banks.

On Wall Street, most major bank shares were higher in noon trading, while the overall market was down more than 1.5 percent.

The administration said its “strong presumption” was that “banks should remain in private hands.”

But the statement also officially amounted to a road map under which the federal government could, if it wanted to, demand a major and possibly a controlling stake in systemically important banks like Citigroup and Bank of America.

The 20 biggest banks will be required to undergo a new “stress test,” starting Wednesday, which is intended to determine whether each bank has enough capital to survive if the economy spirals down even more than most forecasters already expect.

Treasury officials plan to introduce details of the stress test on Wednesday, and it is expected to take several weeks to complete.

If a bank comes up short, Treasury officials said on Monday, the government will require it to raise more capital. If the bank cannot get that money from private sources, the government will demand that the bank swap out the government’s existing, nonvoting preferred shares — issued during the first phase of the Treasury’s $700 billion financial bailout program last September — and replace them with new preferred shares that are convertible to common stock with voting rights.

The requirements will apply both to banks that receive additional money in the months ahead and to banks that have already received money.

In the case of Citigroup, the negotiations do not involve any additional infusions of taxpayer money. Rather, the negotiations are aimed at strengthening Citigroup’s capital position by replacing preferred shares, which resemble debt more than equity, with common shares.

Acquiring common stock would give the government more control, but expose it to more risk. Armed with voting shares, government officials would have more power to oust existing management and change the company’s strategy. But the Treasury would also lose its claim to dividend payments, which in Citigroup’s case amount to more than $2.25 billion a year.

source : The New York Times

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By Emily Kaiser

WASHINGTON (Reuters) - U.S. regulators promised on Monday to prop up struggling banks if needed and said lenders should remain in private hands, even as a source said Citigroup was in talks to give the government a greater stake.

In Europe, the French government said it was pumping extra cash into two mutually owned banks, and the central European central banks took the unprecedented step of talking up the region's currencies.

U.S. stocks, which started higher on the Citigroup talk, turned lower on fears that the bank stabilization plan would not be enough to keep the economy from sliding into a deeper hole. U.S. government bond prices were little changed and the dollar gained against a basket of currencies as investors scrounged for safety.

Amid worries that the United States may still have to nationalize some of its banks, the Treasury Department, Federal Reserve and three other federal agencies said they will start assessing large U.S. banks' capital needs on Wednesday to determine whether a bigger buffer is warranted.

The money could come from the private sector or the government in the form of preferred shares that convert into common stock over time as needed to ensure banks have enough resources to withstand deepening credit losses.

"Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands," the agencies said.

Healthy banks are vital to stemming recession. While some economists have argued that nationalizing weaker institutions would be the fastest way to revive lending, many investors -- particularly in the United States -- worry that government intervention would have a chilling effect on business.

"If the government tells the bank that they need more capital, it's highly unlikely any 'private' source would step up due to the stigma," said Andrew Busch, global foreign exchange strategist with BMO Capital Markets in Chicago."This means that the government's designation could signal a further death spiral for the bank's common stock shareholders," he said.

Citigroup, whose stock has been pounded by fears that the government may seize the bank and wipe out shareholders, was in talks to give the government a larger stake, a person familiar with the matter told Reuters.

The idea under consideration would involve converting a big chunk of the $45 billion (31 billion pounds) in preferred shares the government bought last year into common stock, putting as much as 40 percent of Citigroup into public hands.

The British government announced a similar move last month, saying it would convert preferred shares in Royal Bank of Scotland, which is expected to announce more restructuring this week.

France on Monday also reached out to its lenders, pledging up to 5 billion euros (4 billion pounds) in additional aid for Banque Populaire and Groupe Caisse d'Epargne.

The two mutual banks are expected to detail a merger this week and the new aid could give the government a stake of up to 20 percent in what is set to be France's second-biggest retail bank behind Credit Agricole.

LOSSES MOUNT

Banks around the world have already reported hundreds of billions of dollars in losses and write-downs as defaults spike on mortgages, credit cards, corporate debt and a host of other loans. Investors worry that losses will intensify as the economy weakens, and banks may lack sufficient resources to withstand any further deterioration.

Tighter credit conditions have constrained consumer and business spending, and contributed to a steep decline in global trade. Dresdner Kleinwort economists think corporate bankruptcies worldwide will rise by at least 20 percent this year, after a 14 percent increase in 2008. In the auto industry, one of the hardest hit by the credit contraction and consumer spending slump, Ford reached a tentative agreement with the United Auto Workers union on changes to a retiree health care trust, becoming the first Detroit automaker to secure union concessions on the key issue.

European Central Bank President Jean-Claude Trichet said on Monday that the financial crisis was spilling over into the wider economy and that the euro zone's financial system is under "severe strain.

Joaquin Almunia, the EU's economic chief, said on Monday that the European Union could have to bail out a member state in financial trouble but such a move was unlikely, especially among countries in the euro zone.

European Union leaders at a weekend summit in Berlin backed a doubling of funds for the International Monetary Fund, which has spent billions of dollars in recent months shoring up economies in eastern Europe and elsewhere.

Latvia's government collapsed on Friday and the currencies of countries such as Poland, the Czech Republic and Hungary have come under severe pressure, hitting millions of citizens who have borrowed in foreign currencies such as the euro.

Emerging European Union central banks coordinated to prop up their currencies on Monday, with Czech central bank Governor Zdenek Tuma saying they had agreed that recent falls were overplayed.

In Asia, Japan's biggest brokerage Nomura Holdings Inc said it planned to raise 302 billion yen ($3.3 billion) by selling new shares to boost its capital.

Japan's second-largest bank Mizuho Financial Group said it would issue $850 million in preferred securities to replenish capital erased by a sliding stock market and economy.

Japan also saw its biggest bankruptcy of the year measured by debt as SFCG, a lender to smaller companies, failed with debts of $3.6 billion.

source : Reuters UK

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By Binyamin Appelbaum

The largest U.S. banks reduced the availability of money for consumers and businesses during the final months of 2008 even as the government invested tens of billions of dollars to help them make new loans, according to data released yesterday by the Treasury Department.

The banks that got the most government money, Bank of America and Citigroup, led the retreat. Mortgage loan originations by the two companies in December fell $3.6 billion, or 15 percent, compared with October. New lending commitments to commercial and industrial customers dropped by $2.4 billion, or 11 percent. And the companies reduced the collective spending limit of their credit card holders by $45 billion, about 2 percent.

But the overall decline in lending was modest as some large banks even posted small increases. The data underscores that banks are responsible for only a small part of the overall decline in lending, which is mostly the result of the collapse of rival industries such as mortgage lenders, small-business lenders and Wall Street, which before the crisis collectively provided more than twice as much financing as banks.

Treasury released lending data for the last three months of the year from the 20 largest banks that got taxpayer money as part of the government's financial rescue program. The data is part of a broader effort to increase transparency and accountability. Treasury chose to focus on the largest banks, which together got more than $206 billion, or more than two-thirds of the amount invested so far, rather than requiring reports from all of the more than 350 banks that got money.

Treasury officials urged caution in drawing conclusions from the decline in lending. They argued that much of the decline is the result of a recession that has reduced customer demand and diminished the creditworthiness of many borrowers. Furthermore, they say, the proper baseline for measuring the government's investments is how much lending would have declined without public aid, something it described as impossible to determine.Still, Treasury issued an analysis with the data that reiterated the judgment of senior officials that the investments are working.

Lending "levels would likely have been lower had Treasury not taken actions to stabilize the financial system," the analysis said.

Representatives of the banking industry also viewed the findings as a favorable report card, noting that lending increased across the board from November to December.

"In the wake of the financial crisis, our banks are lending," said Steve Bartlett, chief executive of the Financial Services Roundtable.

But the December numbers remained generally below October levels, a trend that is likely to fuel renewed demands from members of Congress and consumer advocates that the banks must take new steps to increase lending.

The data present a complicated picture for each bank. For example, most companies reported that outstanding credit card balances increased as customers took advantage of borrowing limits. Companies also continued to issue large numbers of new cards. But at the same time, most credit card lenders sharply reduced the amount that their cardholders are allowed to borrow. The combination reflects a short-term increase in lending but a long-term decrease in the availability of loans.

Citigroup, for example, reported that outstanding credit card balances grew by about $800 million, but it reduced total available credit by almost $37 billion.

Similarly, many banks increased lending in selected areas. Citigroup, which has a relatively modest business in lending to commercial and industrial companies, increased its volume of new loans by about $2 billion in December. Bank of America said it was making more auto loans, which it attributed to the struggles of the financing arms of the major car companies.

source: The washington post

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