US bolsters banking system

Mass. giants will share in $250b Treasury plan

Boston financial services giant State Street Corp. and Bank of America Corp. are among major banks and institutions set to receive $250 billion from the US Treasury as part of an unprecedented plan to spur lending.

Treasury officials scheduled a news conference today to reveal details of the plan, under which the government will buy shares directly in institutions, using money from a $700 billion bailout Congress passed this month. Also, the government will guarantee bank debt, one executive said, and the Federal Deposit Insurance Corp. will temporarily guarantee bank accounts typically held by businesses.

In its broad outlines, the investment program resembles a similar plan unveiled by British bank regulators yesterday morning to inject up to $64 billion of capital into several banks, with much of that going to Royal Bank of Scotland, parent of Citizens Bank.

Completing a rush of news remaking the banking industry both locally and worldwide, Spain's Banco Santander said late yesterday it will take control of Sovereign Bancorp in a $1.9 billion stock deal. Santander already owned 24 percent of Sovereign.

Taken together the moves show how governments are hurrying to invest money directly into banks and financial firms to offset bad assets and to ensure they continue lending, said Robert Pollin, an economist at the University of Massachusetts at Amherst.

The move by Santander seems to be an example of a solvent bank able to expand at a time when other institutions are struggling, he added.

"Whether it comes from the private sector or the public sector, the key is injecting capital," Pollin said.

Bank of America, Citizens, and Sovereign are the three largest banks in Massachusetts, with more than $70 billion in combined deposits, according to the most recent federal figures. Once a traditional bank, State Street, meanwhile has transformed itself into powerhouse provider of services for other companies including mutual fund firms.

A Treasury spokeswoman declined to provide details before today's planned announcement from Treasury Secretary Henry Paulson, Federal Reserve chairman Ben Bernanke, and Sheila Bair, head of the Federal Deposit Insurance Corp.

But an executive for a major US bank, speaking on condition of anonymity because the plan hasn't been officially announced, said it would have the Treasury spend about $250 billion to buy preferred shares. The government also would provide guarantees for US bank debt, paid for by fees from the banks themselves rather than taxpayers.

The plan would be more dramatic than the Treasury's original plan to focus on buying mortgage-based securities and other bad debt from companies. But that plan didn't do enough to restore investor confidence quickly, the executive said, hindering the ability of banks to make loans at all. "This is about unclogging the system," he said.

Bank of America, the Charlotte, N.C., institution that is the largest bank in New England, confirmed yesterday it will be among those participating in the program. It said, "We are a healthy bank, we just raised more than $9 billion in capital on our own and we continue to operate quite normally. On the other hand, we recognize that we need to be part of the solution for the wider financial system so we are happy to participate."

State Street representatives declined to comment. Other banks that will participate include Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., and Bank of New York Mellon Corp., according to industry executives.

Bank of America will receive $25 billion in government investment, while State Street will get $3 billion, Bloomberg reported.

It was unclear what terms the government might seek in exchange for its investments, such as limits on executive pay, an idea much discussed. In Britain, in exchange for government cash, RBS replaced its chief executive Fred Goodwin and promised to maintain lending to homeowners and small businesses at 2007 levels, provide mortgage assistance, and observe limits on executive pay, according to a government fact sheet. These limits only apply to British operations and not those in the United States, said a Citizens spokeswoman, Barbara Cottam.

Asked on a conference call yesterday if RBS might sell US assets, new chief executive Stephen Hester said "there are no sacred cows." In a statement the bank provided to the Globe, Hester said, "RBS will be a very international bank. It has a range of powerful customer leading, deposit driven, cash generative franchises" including Citizens. "These are very attractive assets for the Group," he said.

For its part, Santander's purchase of Sovereign follows weeks of drama for the bank headquartered in Philadelphia after it saw a sharp share decline and replaced its chief executive. Sovereign and Santander officials both declined to give more details about how the deal might affect its US executives, many of whom are in Boston.

Ross Kerber can be reached at kerber@globe.com. Material from Globe wire services was used in this report.