US may turn its loans to banks into stock
WASHINGTON - President Obama's top economic advisers have determined they can shore up the banking system without having to ask Congress for more money any time soon, administration officials said. White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they expected, simply by converting the government's existing loans to the nation's 19 biggest banks into common stock.
That would turn the government aid into available capital for a bank - and give the government a large equity stake in return.
While the option appears to be a quick and easy way to avoid a confrontation with congressional leaders who are wary of putting more money into banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.
Taxpayers would also be taking on more risk, because there is no telling what the common shares might be worth when it's time to sell them.
Treasury officials estimate they will have about $135 billion left after they follow through on all the loans that have already been announced. But banks are believed to need far more than that to maintain enough capital to absorb all their losses.
In his budget proposal for next year, Obama included $250 billion in additional spending to prop up the financial system. Because of the way the government accounts for such spending, the budget actually implied that Obama might ask for as much as $750 billion.
The most immediate expense will come in the next several weeks, when regulators complete "stress tests" on the 19 biggest banks. The tests are expected to show that at least several major institutions, probably including Bank of America, need to increase their capital cushions by billions of dollars each.
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 $100 billion.
White House chief of staff Rahm Emanuel alluded to the strategy yesterday on the ABC program "This Week With George Stephanopoulos." Emanuel flatly asserted the government had enough money to shore up the 19 banks without asking Congress for more.
"If they need capital, we have that capacity," he said.
Obama would gain important political maneuvering room because Democratic leaders in Congress have warned they cannot muster enough votes any time soon in support of spending more money to bail out some of the same financial institutions whose aggressive lending precipitated the financial crisis.
Administration officials acknowledged they might still have to ask Congress for extra money in the future. Beyond the 19 big banks, the Treasury has also injected capital into hundreds of regional and community banks.
