GoFuckYourself.com - Adult Webmaster Forum - U.S. Treasury Said to Invest in Nine Major U.S. Banks

By Robert Schmidt and Peter Cook

Oct. 13 (Bloomberg) -- The Bush administration will invest about $125 billion in nine of the biggest U.S. banks, including Citigroup Inc. and Goldman Sachs Group Inc., in the government's latest attempt to shore up confidence in the financial system.

The proposed cash injections in exchange for preferred shares are part of a $700 billion rescue approved by Congress and follow similar moves by European leaders to unfreeze global credit markets by helping beleaguered banks. The other companies are Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp., said people briefed on the plan.

``It's a good thing, it's what needs to happen, it will allow the markets to start functioning again,'' said Ralph Cole, a vice president for research at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which oversees $2.7 billion including shares in JPMorgan, Wells Fargo and Goldman.

The purchases represent a new approach for Treasury Secretary Henry Paulson, who first promoted a bailout targeted at illiquid mortgage-related assets. The urgency for a more immediate infusion has grown as banks struggle to regain the confidence of investors, counterparties and clients after bad loans caused more than $635 billion of writedowns across the industry.

`Something Drastic'

``They've decided they need to do something drastic and this is drastic,'' said Gerard Cassidy, a bank analyst at RBC Capital Markets in Portland, Maine.

The prospect of government support sent stocks higher around the world. The Standard & Poor's 500 Index rebounded from its worst week in 75 years with an 11.6 percent advance. Asian stocks also surged, with the Nikkei 225 Stock Average jumping 13.4 percent, the most ever.

The Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan, people said. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Wells Fargo is to get at least $20 billion, Goldman and Morgan Stanley will each get $10 billion, and State Street and Bank of New York will get about $3 billion each, people said.

The government will obtain its stakes with a type of security designed not to dilute the value of common shares.

None of nine banks getting government money was given a choice about it, said people familiar with the plans. All of the banks involved will have to submit to compensation restrictions as mandated by Congress, people said.

`Healthy' Firms

Another $125 billion will be used to recapitalize other financial institutions around the country, the people said. Neel Kashkari, the U.S. Treasury official overseeing the rescue of the financial system, earlier today said the equity purchases will be aimed at ``healthy'' firms.

Under the plan to be announced tomorrow, the government will also guarantee for three years banks' newly issued senior unsecured debt, making it easier for them to refinance their liabilities, the people said.

Paulson, Federal Reserve Chairman Ben S. Bernanke and FDIC Chairman Sheila Bair scheduled a press conference at 8:30 a.m. tomorrow in Washington. The U.S. initiative follows an announcement that France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion to guarantee bank loans and take stakes in lenders.

`Comprehensive Actions'

The press conference will address ``a series of comprehensive actions to strengthen public confidence in our financial institutions and restore functioning of our credit markets,'' the Treasury said in a e-mailed statement.

Another part of the plan to be announced tomorrow would let the government expand FDIC coverage of non-interest bearing accounts, which are commonly business deposits.

Earlier today, Paulson summoned chief executive officers of the nine banks to the Treasury's headquarters in Washington to lay out the government's plans. The executives sat across the table with the heads of the Treasury, the Fed and other regulators.

After climbing for weeks, money-market rates in London earlier today fell after policy makers offered banks unlimited dollar funding and European governments pledged to take ``all necessary steps'' to shore up confidence among lenders.

The London interbank offered rate, or Libor, for three- month dollar loans dropped 7 basis points to 4.75 percent today, tied for the largest drop since March 17, the British Bankers' Association said.

Similar to Buffett

The government plan to buy preferred shares with warrants is similar to investments that Berkshire Hathaway Inc., the company run by billionaire Warren Buffett, made recently in Goldman and General Electric Co. Rather than buying common stock in the companies, which has declined in recent weeks, Buffett bought preferred stock paying a 10 percent dividend and received warrants that allow him to buy common stock at a pre-set price.

John Paulson, the founder of hedge fund Paulson & Co., wrote in a Sept. 26 editorial in the Wall Street Journal that the Treasury should adopt Buffett's approach rather than buying trouble assets.

Scott Talbott, chief lobbyist of the Financial Services Roundtable in Washington, which represents 100 of the biggest firms in the industry, said the group ``is very supportive of using all these tools in varying degrees to help restore liquidity to the market.''

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