Published April 21, 2009

US govt may become bank shareholder: report

By converting loans into stock, it would not have to seek more bailout money

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(WASHINGTON) US President Barack Obama's economic advisers have determined that they can shore up top US banks without asking Congress for more money by converting loans into stock, The New York Times reported yesterday.

Mr Emanuel: Asserts that the government has enough money to shore up the 19 banks without asking Congress for more bailout funds

Citing unnamed administration officials, the newspaper said the move would convert the US government into part owner of some key banks.

White House and Treasury Department officials now say they can stretch what is left of the US$700 billion financial bailout fund further than they had expected a few months ago, the report said.

They believe this could be achieved simply by converting the government's existing loans to the nation's 19 biggest banks into common stock, the paper noted.

But converting those loans to common shares would turn the federal aid into available capital for a bank - and give the government a large ownership stake in return, NYT pointed out.

While the option appears to be a quick and easy way to avoid a confrontation with congressional leaders, some critics would consider it a back door to nationalisation since the government could become the largest shareholder in several banks, the report said.

The change to common stock would not require the government to contribute any additional cash, but it could increase the capital of big banks by more than US$100b.

According to the report, the Treasury Department has already negotiated this kind of conversion with Citigroup and said it would consider doing the same with other banks.

The administration would have to decide how to handle its considerable voting rights on the boards of banks included in the programme. Taxpayers would also be taking on more risk, because there is no telling what the common shares might be worth when it comes time for the government to sell them.

Treasury officials estimate that they will have about US$135 billion left after they follow through on all the loans that have already been announced. But the nation's banks are believed to need far more than that to maintain enough capital to absorb all their losses from soured mortgages and other recession-induced loan defaults.

The change to common stock would not require the government to contribute any additional cash, but it could increase the capital of big banks by more than US$100 billion.

The White House chief of staff, Rahm Emanuel, alluded to the strategy on Sunday in an interview on the ABC programme This Week With George Stephanopoulos. Mr Emanuel flatly asserted that the government had enough money to shore up the 19 banks without asking Congress for more.

The Treasury has already negotiated this kind of conversion for Citigroup. Under a plan announced in January, Citigroup would convert up to US$25 billion of preferred stock, which is like a loan, to common stock, which represents equity.

After the conversion, the Treasury would end up with about 36 per cent of Citigroup's common shares, which come with full voting rights. That would make the government Citigroup's biggest shareholder, effectively nudging the government one step closer to nationalising major banks.

Nationalisation, or even just the hint of nationalisation, is a politically explosive step that White House and Treasury officials have fought hard to avoid.

Despite encouraging signs of stability, 'risks remain real and significant' for the US economy, President Barack Obama cautioned in an interview published on Sunday.

'History has shown repeatedly that when nations do not take early and aggressive action to get credit flowing again, they have crises that last for many years instead of many months,' Mr Obama told Fortune magazine.

'My hope is that by taking the steps we are taking today, from stabilising our financial system to helping our auto industry restructure to become more competitive, it will help speed the day that the government can get out of the way and let the private sector do what it does best - innovate, create jobs, and grow the economy,' he said.

But the president cautioned that the US economy still faced major challenges and that further reforms were needed, notably to beef up regulatory powers over the finance industry. -- AFP, NYT