Capital Markets

Starting Today, Banks Can Tap Government

Treasury Secretary Paulson says "healthy" banks outside of the nine biggest ones already taking part, can apply to the government's $250 billion ca...
Sarah JohnsonOctober 20, 2008

Treasury Secretary Henry Paulson provided a glimmer of hope for corporate borrowers this morning by shooting the starter’s pistol for the possible infusion of capital into a new group of borrowers. Financial institutions wanting to tap into the government’s $250 billion capital-infusion program can begin applying today. They have until November 14, 2008, to seek out the government as a stockholder.

In exchange, the government expects to receive “a reasonable return” on its investment and receive warrants for common shares, Paulson said Monday.

Last week, the Treasury stated that it would buy up to $250 billion in preferred stock from “healthy” banks and thrifts that ask for the government’s help. Eligible institutions would have to agree to governance restrictions on executive compensation, such as clawbacks and a ban on golden parachutes.

At a press conference today, Paulson said that “a broad group of banks of all sizes” are interested in the government’s funds that were made available when President Bush signed the Emergency Economic Stabilization Act two weeks ago. Paulson implied, however, that banks don’t have to rush to apply since the decision on which institutions will get money won’t be made on a “first-come, first-served” basis. “Sufficient capital has been allocated so that all qualifying banks can participate,” he said.

Nine of the largest U.S. banks — including Bank of America, Citigroup, Goldman Sachs, and JP Morgan Chase — have already agreed to take part, after their chief executives reportedly felt compelled by Paulson to jointly agree to his terms so that a stigma would not be attached to any one bank’s involvement.

At a press conference today, Paulson said the program is designed “to increase confidence in banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital.”

Banks can apply to participate through their primary regulator, either the Federal Reserve, Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, or the Office of Thrift Supervision. All those regulators will have the application posted on their websites by the end of today, Paulson said.

The Treasury will consider regulators’ recommendations for which institutions will receive the government’s money. The government will not share which applications are denied. But it will let the public know of any transactions that are made within 48 hours.

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