Regulators pledge to aid banking system

WASHINGTON – Federal regulators said Monday they will launch a revamped program to shore up the nation’s troubled banks that includes the option of increasing government ownership in financial institutions.

The new plans are the Obama administration’s latest attempt to bolster the strength of the banking system without nationalizing any institutions, which the White House has said it does not intend to do.

The Treasury Department, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve jointly issued the statement amid growing concern that some of the country’s biggest banks may need additional assistance to survive the fallout from the worst financial crisis since the 1930s.

The new program – a crucial component of President Barack Obama’s strategy for handling the $700 billion financial bailout – would give the government greater flexibility in dealing with troubled banks.

In a new twist, regulators have the option of allowing the government to boost its ownership in banks without having to pour more taxpayer money into them. That would be done through a technical change converting the status of the government’s shares in a financial institution.

Citigroup Inc. has approached banking regulators about ways the government could help strengthen the bank, including the stock conversion plan, according to people familiar with the discussions. They spoke on condition of anonymity because they are not authorized to speak on behalf of the government or the company. A Citigroup spokesman declined to comment Monday afternoon.

Still, the regulators suggested keeping banks private is a priority.

“Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption (of the program) is that banks should remain in private hands,” the regulators said.

The new federal program, like the old one, will allow the government to continue to inject more taxpayer money, or capital, into a bank in an effort to ride out the financial storm.

Of the first $350 billion in bailout funds, $250 billion was used to provide capital injections to banks, including Citigroup, Bank of America Corp. and others. But the Obama administration has not said how much of the second $350 billion will be used for that purpose.

The regulators on Monday did not name any specific banks or respond to reports that the government was considering increasing its ownership of Citigroup.

The White House last week downplayed persistent speculation that some banks could be effectively nationalized by the federal government.

“A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery,” the regulators said. “The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses.”

A revamped program, announced by Treasury Secretary Timothy Geithner earlier this month, to plow federal money into banks in return for giving the government ownership stakes will start Wednesday.

Regulators provided some details of that program Monday.

“Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory,” the regulators said.

Such a conversion into common stock would give the federal government more control of a bank – without necessarily having to put up more taxpayers’ dollars – and could be applied retroactively to banks that already have received billions in capital injections.

The banks also benefit because preferred shares pay higher dividends, so converting them into common shares will help ease their repayment burden.

Such an option is being considered for Citigroup but also could be available for other banks as well, according to people familiar with the new capital injection program. They spoke on condition of anonymity because they are not authorized to speak for the government.

When asked about reports that the government was considering increasing its ownership of Citigroup, Treasury spokesman Isaac Baker said the department did not comment on conversations with specific banks.

“We’ve made clear that we will do what is necessary to strengthen and stabilize the financial system so that it can provide the credit necessary to support economic recovery,” Baker said in a statement.