The U.S. Treasury Department, according to WSJ – in a step that would have appeared inconceivable a few months ago, is expected to announce on Tuesday a $250 billion plan to purchase equity stakes in potentially 8,000-plus federally insured banks by using funds approved by Congress through the $700 billion bailout bill.
Treasury will buy $25 billion in preferred stock in Bank of America (BAC), J.P Morgan (JPM) and Citigroup (C); between $20 billion and $25 billion in Wells Fargo (WFC); $10 billion in Goldman Sachs (GS) and Morgan Stanley (MS); and between $2 billion and $3 billion in Bank of New York Mellon (BK) and State Street (STT). It was unclear whether the Bank of America stake included Merrill (MER), which the bank has a deal to acquire.
The bank capitalization plan imitates moves announced by European governments over the weekend. European leaders agreed on Sunday in a meeting in Paris to commit $2 trillion to guarantee interbank loans and take equity stakes in banks. The moves delivered a hefty boost to global stock markets on Monday, seeing the Dow Jones rise its most in 75 years and S&P 500 in 69 years.
The Treasury plan will also contain a provision where the FDIC is expected to temporarily extend its backstop from bank deposits to new funds raised by banks and thrifts for three years. That would be an aid to companies that have had a hard time raising capital without government assistance.The FDIC is also expected to temporarily lift the insurance limits for non-interest bearing bank deposit accounts. This would extend beyond the $250,000 limit per depositor that lawmakers agreed on two weeks ago.
Buying shares of financial institutions has become the latest focus of Treasury Secretary Henry Paulson’s rescue plan who has grown increasingly concerned about the worsening situation and wants now to aim government dollars directly at bank balance sheets.
Details of the plan, according to Journal, are still being finalized, but the equity-injection program is expected to be open to almost all banks, with a focus on getting the participation of the firms most important to the financial system.
The Journal also noted, that Treasury Paulson was scheduled to meet with U.S. banking heads who were in Washington for meetings of the World Bank and the International Monetary Fund. Expected to attend were Ken Lewis, CEO of Bank of America (BAC), Jamie Dimon, CEO of J.P. Morgan (JPM), Lloyd Blankfein, CEO of Goldman Sachs (GS), John Mack, CEO of Morgan Stanley (MS), Vikram Pandit, CEO of Citigroup (C), and Robert P. Kelly, CEO of Bank of New York Mellon (BK).