Monday, October 20, 2008

Bailout interest 'broad' - Paulson

Banks of all sizes are interested in a piece of the federal government's $250 billion fund to recapitalize financial institutions, Treasury Secretary Henry Paulson said Monday.

"We have received indications of interest from a broad group of banks of all sizes," he said.

The capital infusion is among the government's latest attempts to strengthen the teetering United States financial system. The funds come from the $700 billion bailout package passed by Congress in early October and follows similar moves by European governments.

Many America banks, however, were initially lukewarm to the idea of having the government take an equity stake when the program was announced a week ago. The head of the American Bankers Association last week praised the program for being voluntary and noted the strong capital position of many institutions.

Banks must apply for funds by Nov. 14, Paulson said. They must consult with their primary federal regulator before applying.

Banks could start receiving money soon after they apply, regulators said. The government won't wait until the deadline to release the funds.

Under guidelines released Monday, an eligible institution will be able to sell the government an equity stake of up to 3% of its risk-weighted assets. The aid will take the form of preferred stock.

Nine of the nation's largest banks have already agreed to participate in the program and will receive half the funds. They are: Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), Bank of America (BAC, Fortune 500), Morgan Stanley (MS, Fortune 500), Goldman Sachs (GS, Fortune 500), Merrill Lynch (MER, Fortune 500), State Street (STT, Fortune 500) and Bank of New York Mellon (BK, Fortune 500).

Any bank, savings association, bank holding company or savings and loan holding company established and operating in the United States is eligible. Institutions controlled by foreign companies are not.

However, banks in serious financial trouble may not qualify for the capital injections, regulators indicated. When pressed, they declined to specify why a bank would be deemed too unhealthy to participate. Among the criteria regulators are examining are an institution's health, lending ability, possibility of outside capital raising and merger opportunities.

Being involved in a merger could make an otherwise unhealthy bank eligible for an infusion, they said.

The government investments will be considered Tier 1 capital, which supports a bank's lending operation.

There is enough money to go around, Paulson said.

"Sufficient capital has been allocated so that all qualifying banks can participate," Paulson said. "Let me be clear that this program is not being implemented on a first-come-first-served basis."

However, he cautioned banks against keeping the money in-house. One of the main problems in the weakening economy is that banks are afraid to lend.

"Our purpose is to increase confidence in our banks, so that they will deploy, not hoard, their capital," Paulson said. "And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people."

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