/ 11 October 2008

US to invest directly in banks

The United States government plans to invest directly in US banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said on Friday, expanding the focus of the government’s $700-billion rescue plan.

”We’re going to do it as soon as we can do it and do it effectively,” Paulson said when asked about an equity-buying plan.

”There’s no doubt in our mind, given the magnitude of the issue … that we can use the taxpayers’ money more effectively and efficiently … if we develop a standardised programme for making, encouraging equity participation,” he added.

A $700-billion US government rescue plan approved last week had initially focused on the problem of liquidity for banks by offering to buy up their toxic assets.

Paulson’s comments demonstrate how the Treasury, after initially resisting the idea, now recognises the need and attraction of direct investments in struggling banks which are unable to raise new capital from private investors.

Analysts and officials say there is a precedent for the US government buying equity in the Reconstruction Finance Corporation created during the Great Depression when thousands of banks failed.

The rescue plan, called the Troubled Asset Relief Programme, has so far failed to calm investors or restore confidence in the financial system. The leading indices for the US stock market tumbled by 18% over the week.

Implementation is taking time because of the complexity of the problems, but Paulson said officials were ”working around the clock to deal with this”.

The secretary of state has warned that the first purchases of toxic assets could take several weeks and he gave no timetable for the equity purchase programme. He also declined to comment on the amount of money that would be spent on buying toxic assets compared with equity.

”I’m not prepared to say today about the relative sizes,” he said.

On Wednesday, the British government unveiled a plan that would make £50-billion of taxpayers’ money available to buy shares in the country’s banks, leading some to speculate that the US would follow suit.

Under a five-point Group of Seven (G7) ”action plan” announced on Friday, leading economic powers would seek to ensure that banks ”can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses”.

Paulson said that efforts to fight the financial crisis would be in cooperation with the G7 and said any government stock purchase would be in non-voting shares.

One of the concerns about public stakes in banks is the influence the government would be able to exert on company management as a shareholder. Non-voting shares largely mitigate this risk.

US investment bank Morgan Stanley has become a leading candidate for a state capital injection.

Shares in the group, one of only two independent investment banks left on Wall Street, have collapsed in the last week.

The future of the bank had looked secure after Japanese peer Mitsubishi UFJ Financial Group said it would buy nearly a quarter of the company for $9-billion, but there is speculation that the deal might fail or be renegotiated.

”As we develop plans to purchase equity, as in the approach we are taking to broad mortgage asset purchases, we are working to develop a standardised programme that is open to a broad array of financial institutions,” Paulson said in a statement.

”Such a programme would be designed to encourage the raising of new private capital to complement public capital.” — Sapa-AFP