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US Wants to Keep Banks Private in New Rescue Plan

by Jeannine Aversa

WASHINGTON - Federal regulators pledged Monday to do all they can to shore up the struggling banking system while keeping banks "in private hands" as they plan to launch a revamped program to inject capital into financial institutions on Wednesday.

A man enters a branch of Citibank in Tokyo February 23, 2009. Citigroup is in talks that could result in the U.S. government increasing its stake in what was the country's most valuable bank, a source said, and the Wall Street Journal said taxpayers could own as much as 40 percent of the ailing lender's common stock. REUTERS/Kim Kyung-Hoon (JAPAN) 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.

JOINT STATEMENT: Read the full text

"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," the regulators said in a statement issued by the U.S. Treasury that named no individual banks.

"The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth," the regulators said. "Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments."

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

Separately, The Wall Street Journal is reporting the U.S. government would increase its ownership stake in Citigroup (C) by converting preferred stock it has purchased in the bank in recent months into common stock - an alternative to nationalizing the bank.

Citigroup declined to comment on the Journal report.

Though declining to specifically discuss a potential deal with Citi, Treasury Department spokesman Isaac Baker said banks can apply to convert the government's preferred stock to new convertible stock that can be turned into common shares at the option of the bank.

"We are open to considering a request to do so if the institution and its regulator believe it would promote the long term stability of that institution, and if we believe it's in the best interest of long term stability of our economy and financial system," Baker said.

Fears of bank nationalization have grown as investors fret about possible takeovers of some of the nation's most troubled banks. Exactly how a new government rescue plan could be shaped has concerned investors since few details have emerged, fueling the recent sell-off in bank stocks.

Under the reported government plan for Citigroup, current shareholders' stakes would be diluted - but not wiped out completely - a scenario that would likely happen if the government completely takes control of the bank.

The plan would not pump additional cash into Citigroup, which has already received $45 billion in capital along with guarantees to cover losses on hundreds of billions of dollars in risky investments and loans from the government amid the ongoing credit crisis. The potential move would also not mean the government completes a full takeover of the beleaguered bank, which has been among the hardest hit by rising loan defaults and sinking values of some of its investments.

The plan for Citigroup cited by the Journal isn't as drastic as a full government takeover. If the U.S. moves ahead with the plan to convert its preferred stock in Citigroup into common stock, it could provide a blueprint for moves at other banks.

On Friday, government officials sent mixed signals about the possibility of the government taking over some banks. A spokesman for President Obama tried to downplay potential nationalization talk, while Democratic Sen. Christopher Dodd said some sort of nationalization might be needed on a short-term basis.

In a research note released Monday, Friedman Billings, Ramsey & Co. analyst Paul Miller said markets are "increasingly factoring in some sort of nationalization of the banking sector," but that while the move might be a "scary proposition for investors," it is likely to provide the quickest and cheapest option to help rid banks of bad assets and recapitalize them.

"We believe the quickest and lowest cost solution is for the government to close down troubled financial institutions, regardless of size, extract the toxic assets, and sell the good portions of these financial institutions to private investors as quickly as possible," Miller wrote in the note.

A similar scenario played out last fall when the government took over Washington Mutual and quickly sold its strong deposit franchise and other healthy businesses to JPMorgan Chase.

The duration of government control would have to be limited, Miller said, with the largest financial firms being held for about six months to a year at most, in an effort to expedite a turnaround in the industry.

Contributing: Reuters

 

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