Federal Stakes in U.S. Banks: Details, Please

The U.S. Treasury's plan to buy into troubled banks has investors asking 'when, how, and which'?

by Theo Francis and Jane Sasseen

After a weekend in which European leaders promised to make billions of euros available in a bid to revive bank-to-bank lending, investors are sure to shift their attention back to the U.S. Bush Administration officials have already made clear that their emphasis has shifted from liquidity—buying up problem assets—to shoring up capital at banks and other financial institutions. The U.S. Treasury has made clear it plans to provide capital by taking stakes in financial companies.

But the market wants details: when, how, and which institutions, to start. "The experiences of the past several weeks have conditioned the market to be skeptical of vague or ambiguous solutions," Morgan Stanley analyst Ned Rumpeltin said after the Group of Seven industrialized nations issued a broadly worded "plan of action" on Friday.

Conditions Remain Fluid

In prepared remarks he delivered Monday morning, Oct. 13, Neel Kashkari, the Treasury official heading the agency's financial rescue efforts, outlined some of the steps the agency is taking to get the rescue program up and running. A critical ingredient, he told the financiers gathered at the Four Seasons Hotel in Washington for a meeting of the Institute of International Bankers, is the flexibility Congress gave Treasury in deciding how to set up and implement the rescue programs—flexibility is necessary, Kashkari added, "because the one constant throughout the credit crisis has been its unpredictability."

While Treasury officials remained vague on timing, there are suggestions that significant moves may come soon: Kashkari said the agency expects to name "the prime contractor" to help Treasury buy troubled assets and stakes in banks within 24 hours; the agency will name companies to manage whole mortgages and asset-backed securities within the "next few days." And The Wall Street Journal reported late Monday morning that Treasury Secretary Henry Paulson would meet with top banking chiefs at 3 p.m., likely to discuss details of the agency's plan to take equity stakes in banks and other financial institutions.

Kashkari made it clear the agency is taking a broad approach to resolving the crisis. And speed, he acknowledged, is of the essence. Treasury officials are continuing to work around the clock to get the program set up. "A program as large and complex as this would normally take months—or even years—to establish. We don't have months or years," he said.

Weekend events underscored just how fluid conditions remain. European leaders said they will buy stakes in financial institutions and guarantee loans among them. Each country will act independently under the joint framework; Germany and France were said to have plans to unveil their programs Monday. New Zealand guaranteed bank deposits; Australia did so as well and also said it will provide guarantees for interbank lending. There was talk that the London exchange could suspend trading to allow investors to absorb rescue-plan details and that U.S. authorities might halt short-selling of stocks that see a 20% or greater decline in a day.

Renegotiating with Mitsubishi

Also on Monday morning, Morgan Stanley (MS) said that Mitsubishi UFJ Financial Group has completed its $9 billion investment in the firm, giving it a much-needed capital infusion. Morgan Stanley had brought Treasury and Federal Reserve officials in to help it renegotiate a $9 billion investment from Mitsubishi, which was seeking better terms for the investment amid a sharp slide in Morgan Stanley's stock price; both sides sought reassurances from the Treasury that any government investment in Morgan Stanley won't wipe out Mitsubishi's. According to the Associated Press, as part of the revised deal, Mitsubishi will receive $7.8 billion in convertible preferred stock that carries a 10% dividend and is convertible at a price of $25.25 per share. The Japanese bank will also receive $1.

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