US govt to invest in key banks
Injection of up to US$250b and debt guarantees to get banks to start lending
Mr Paulson has told bankers to accept government investment for the good of the financial system.
IN ITS boldest move yet amid a welter of government action, the United States Treasury Department announced yesterday that it will invest up to US$250 billion (S$366 billion) in key banks.
The radical step - similar to moves taken in Europe and Britain - is seen as the most potent attempt yet to end the crisis.
‘We must restore confidence in our financial system,’ Treasury Secretary Henry Paulson said yesterday. ‘The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.’
The government will invest up to $25 billion in each institution, which they must accept by Nov 14 and accept the Treasury’s rules on executive pay and bonuses.
‘This is an essential short-term measure to ensure the viability of America’s banking system,’ said US President George W. Bush yesterday.
In addition to the huge injection of fresh capital, two other programmes will be introduced:
New debt issued by banks will be guaranteed by the government for three years. The move aims to encourage banks to resume lending to one another and to customers.
The Federal Deposit Insurance Corporation (FDIC) will offer guarantees on non-interest bearing bank deposits. This mirrors similar moves in various European countries.
These changes to the financial landscape - taking stakes in institutions and making Washington the ultimate guarantor - would have been unimaginable a few weeks ago.
Mr Paulson outlined the plan to nine of the nation’s top bankers, including bosses from Bank of America, JPMorgan Chase, Goldman Sachs, Morgan Stanley and Citigroup on Monday.
He told them that they would have to accept government investment for the good of the financial system, according to an observer briefed on the discussions.
Of the US$250 billion, which will come from the US$700 billion bailout approved by Congress, half is to be injected into these big banks but the government will not run them.
The other half of the US$250 billion is earmarked for smaller banks. These 8,500 banks can choose whether to participate. If they accept, the investment will be on similar terms as those in the big banks.
The second move involves the FDIC creating a parallel insurance programme to guarantee investments in debt issued by banks.
At the core of the crisis is a breakdown in confidence that has made banks unwilling to lend money to each other, the lifeblood of an economy.
Officials said they hoped the guarantee on new senior debt will have an even broader effect than an interbank lending guarantee - adopted by some European countries - because it should also stimulate lending to businesses.
Another part of the government’s remedy is to extend the federal deposit insurance to cover all non interest-bearing deposits. Since banks are not allowed to pay interest on business accounts, the government is effectively guaranteeing the deposits of the nation’s small businesses.
Government lifeline for these banks
United States
Bank of America
Citigroup
Goldman Sachs
JPMorgan Chase
Morgan Stanley
Bank of New York Mellon
Wells Fargo
United Kingdom
Northern Rock
Royal Bank of Scotland
HBOS and Lloyds TSB
Belgium/France
Dexia
Germany
Hypo Real Estate
Belgium/Luxembourg/Netherlands
Fortis
Iceland
Kaupthing Bank
Landsbanki Islands
Glitner Bank
Denmark
Roskilde Bank
NEW YORK TIMES, WASHINGTON POST, REUTERS, BLOOMBERG
Source : Straits Times - 15 Oct 2008
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