Regulators Pledge To Shore Up Financial System

By: By JEANNINE AVERSA
By: By JEANNINE AVERSA

WASHINGTON (AP) - Federal regulators said Monday they will
launch a revamped program to shore up the nation's troubled banks
that includes the option of increasing government ownership in
financial institutions.

The Treasury Department, Federal Deposit Insurance Corp., Office
of the Comptroller of the Currency, Office of Thrift Supervision
and the Federal Reserve jointly issued the statement amid growing
concern that some of the country's biggest banks may need
additional assistance to survive the fallout from the worst
financial crisis since the 1930s.

The new program - a crucial component of President Barack
Obama's strategy for handling the $700 billion financial bailout -
would give the government greater flexibility in dealing with
troubled banks.

In a new twist, regulators have the option of allowing the
government to boost its ownership in banks without having to pour
more taxpayer money into them. That would be done through a
technical change converting the status of the government's shares
in a financial institution.

Still, the regulators suggested keeping banks private is a
priority.

"Because our economy functions better when financial
institutions are well managed in the private sector, the strong
presumption (of the program) is that banks should remain in private
hands," the regulators said.

And the new program, like the old one, will allow the government
to continue to inject more taxpayer money, or capital, into a bank,
in an effort to ride out the financial storm. Of the first $350
billion in bailout funds, $250 billion was used to provide capital
injections to banks, including Citigroup Inc., Bank of America
Corp. and others. But the Obama administration has not said how
much of the second $350 billion will be used for that purpose.

The regulators on Monday did not name any specific banks or
respond to reports that the government was considering increasing
its ownership of Citigroup.

The White House just last week downplayed persistent speculation
that some banks could be effectively nationalized by the federal
government.

"A strong, resilient financial system is necessary to
facilitate a broad and sustainable economic recovery," the
regulators said. "The U.S. government stands firmly behind the
banking system during this period of financial strain to ensure it
will be able to perform its key function of providing credit to
households and businesses."

A revamped program, announced by Treasury Secretary Timothy
Geithner earlier this month, to plow federal money into banks in
return for giving the government ownership stakes will start
Wednesday.

Regulators provided some details on that program Monday.

"Any government capital will be in the form of mandatory
convertible preferred shares, which would be converted into common
equity shares only as needed over time to keep banks in a
well-capitalized position and can be retired under improved
financial conditions before the conversion becomes mandatory," the
regulators said.

Such a conversion into common stock would give the federal
government more control of a bank - without necessarily having to
put up more taxpayers' dollars and could be applied retroactively
to banks that already have received billions in capital injections.

Such an option is being considered for Citigroup but also could
be available for other banks as well, according to people familiar
with the new capital injection program. They spoke on condition of
anonymity because they are not authorized to speak for the
government.

When asked about reports that the government was considering
increasing its ownership of Citigroup, Treasury spokesman Isaac
Baker said the department did not comment on conversations with
specific banks.

"We've made clear that we will do what is necessary to
strengthen and stabilize the financial system so that it can
provide the credit necessary to support economic recovery," Baker
said in a statement.

The government is open to considering a request to convert
preferred shares purchased as part of its $700 billion rescue
program into common stock "if the institution and its regulator
believe it would promote the long term stability of that
institution and we believe it's in the best interest of long term
stability of our economy and financial system," Baker said.

The Wall Street Journal reported late Sunday that Citigroup was
in talks with federal officials over the possibility of the
government expanding its ownership of the struggling bank to as
much as 40 percent of its common stock. The newspaper said bank
executives hope the stake will be closer to 25 percent.

The new capital injection program will require banks to under go
"stress tests" to examine their financial health and determine
whether additional capital is needed. Details on how these tests
will work may be provided Wednesday, the people familiar with the
plan said.

"Currently, the major U.S. banking institutions have capital in
excess of the amounts required to be considered well capitalized,"
the regulators said. However, as part of the stress tests, banking
examiners will be looking closely at both the quality and quantity
of capital.

Later Monday, Geithner will join Obama and other guests at a
fiscal responsibility summit at the White House to discuss how to
curb a burgeoning federal deficit laden with Social Security,
Medicare and Medicaid obligations.
----
AP Economics Writer Martin Crutsinger contributed to this
report.


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