US To Recapitalise Banks With Public Money

Tom Burroughes

14 October 2008

The US government is to recapitalise US banks with $250 billion, including an injection of $125 billion into nine of the biggest banks such as Citi, Goldman Sachs and Bank of America. The administration aims to revive confidence in financial markets with the measure that forms part of its recently-approved $700 billion bailout package, media reports said.

The proposed cash injections follow similar moves by European nations, such as the UK, Germany and France, to unfreeze credit markets by helping beleaguered banks. The recapitalisations of banks by EU and expected steps by the US administration represent a significant rise in public sector control over financial firms, many of which oversee large wealth management operations.

The other companies affected by the US initiative are Wells Fargo, JPMorgan, Merrill Lynch, Morgan Stanley, State Street and Bank of New York Mellon, said people briefed on the plan, according to Bloomberg.

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 write-downs.

Mr Paulson will discuss his plan at a press conference at 8:30 am EDT today in Washington.

The Treasury plans to spend $25 billion each for stakes in Citi and JPMorgan, Bloomberg said, citing unnamed sources. 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 the nine banks getting government money was given a choice about it, said people familiar with the plans.