US may buy shares with voting rights to help “stressed” banks

February 24th, 2009 - 10:50 am ICT by IANS  

Washington, Feb 24 (IANS) The US government has warned America’s biggest banks that it could become their biggest shareholder with voting rights if regulators decide they are not strong enough to weather a deeper-than-expected downturn in the economy.

The Treasury Department, Federal Reserve and federal bank regulatory agencies announced Monday that the government might end up demanding a direct ownership stake in major banks after they undergo a tough “stress test” shortly.

“The capital needs of major US banking institutions will be evaluated under a more challenging economic environment,” they said in a statement. “Should that assessment indicate that an additional capital buffer is warranted,” it continued, the banks could be required to give the government a right to acquire common shares, with voting rights.

The statement came as federal regulators confirmed reports that they were in discussions with Citigroup headed by Indian-American chief executive Vikram Pandit over that kind of swap.

Citigroup, which has received $45 billion in direct assistance and given the Treasury nonvoting preferred shares that pay a guaranteed dividend, is negotiating to swap the preferred shares for common shares that would give the government a stake as high as 40 percent.

The New York Times and the Wall Street Journal citing administration officials said Citigroup had initiated the talks with federal regulators, and the new statement stopped well short of declaring that regulators were ready to partly or wholly “nationalise” any major banks.

On Wall Street, most major bank shares were higher in noon trading, while the overall market was down more than 1.5 percentwith the Dow Jones industrial average and S&P 500 tumbling to their lowest levels since 1997.

The administration said its “strong presumption” was that “banks should remain in private hands.” But the statement also officially amounted to a road map under which the federal government could, if it wanted to, demand a major and possibly a controlling stake in systemically important banks like Citigroup and Bank of America.

The 20 biggest banks will be required to undergo a new “stress test,” starting Wednesday, which is intended to determine whether each bank has enough capital to survive if the economy spirals down even more than most forecasters already expect.

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