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

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2 billion in non-convertible preferred stock, which also carries a 10% dividend.

That shows why the details are critically important when the government takes its equity positions: Concern that a subsequent government investment would seriously dilute existing shareholders' stakes could give potential private sector investors another excuse to remain on the sidelines. "One view of the Great Depression is that what delayed the recovery was that companies held back investment until they became confident that the rules were not going to change abruptly," wrote Strategas Research Partners in a note to investors on Sunday.

Kashkari tried to reassure the bankers that Treasury is working as quickly as possible to set up the rules under which it will operate—and that it is working "in close cooperation with both domestic and international regulators to understand how best to design tools that will be most effective in dealing with the challenges in our financial system." Financial market participants also say Treasury officials have stepped up efforts in recent days to solicit their advice on how to proceed in ways that would be least disruptive to markets and bring about the largest response.

The agency has set up seven teams to oversee the program in each of the critical areas. The first two will oversee the purchase of mortgage-backed securities and whole loans. Others include a program to insure troubled assets, a standardized program to purchase equity in a broad array of financial institutions, and another to focus on keeping struggling homeowners in their homes after the Treasury purchases mortgages and mortgage-backed securities. "We will look for every opportunity possible to help homeowners," Kashkari said.

Preventing Conflicts of Interest

Finally, two other teams will oversee executive compensation and oversight. The executive comp team, he said, is already working hard to define the requirements for financial institutions to participate in three possible scenarios. "One, an auction purchase of troubled assets; two, a broad equity or direct purchase program; and three, a case of an intervention to prevent the impending failure of a systemically significant institution"

Federal Reserve Board Chairman Ben Bernanke will head the oversight board, which will be in charge of preventing conflicts of interest. "Taking aggressive steps to manage potential conflicts of interest is essential because firms with the relevant financial expertise may also hold assets that become eligible for sale into the TARP," Kashkari said.

Kashkari also said Treasury is moving quickly to hire the executives necessary to begin running the program. Tom Bloom, the CFO of the Office of the Comptroller of the Currency and former CFO of the Commerce Dept., will serve as the program's interim chief financial officer. Jonathan Fiechter, Deputy Director of the IMF Monetary and Capital Markets Department in charge of financial supervision and crisis management and a former board member of the Resolution Trust Corporation and the FDIC, will serve as interim chief risk officer.

Still, little is know about which companies the government will invest in. Treasury has said its capital-injection program will be voluntary—banks must apply to sell the government a stake. But how will the Treasury determine which to help and which to say no to?

Pressure to Help Regionals, Too

Officials have said they don't intend to pump taxpayer dollars into institutions that are likely to fail even after receiving government help. That entails accurately predicting which companies will live and which will die, which is notoriously tricky to do: Over time, only about 13% of banks that make the Federal Deposit Insurance Corp.'s list of troubled institutions go on to fail. Expect big "systemically important" institutions to get help first. There is also political pressure to include the regional banks that serve small businesses and local economies.

There is some fear that banks will prove reluctant to seek government capital—that doing so makes them appear shaky. That could spur the government to act first, swooping in to provide capital to key banks before being asked in order to head off collapse.

For firms that don't meet Treasury's survival test, expect to see government-brokered takeovers like the acquisition of a Washington Mutual by JPMorgan Chase immediately after WaMu was seized by the FDIC in late September. Such tie-ups would forestall the risk of another Lehman Brothers, where the investment bank's collapse had widespread repercussions, contributing to American International Group's near-collapse and subsequent government rescue.