Treasury To Invest In More Banks

By Binyamin Appelbaum and David Cho
Washington Post Staff Writers
Friday, October 24, 2008; Page D01
The Treasury Department will announce as soon as today that a group of large regional banks have agreed to accept investments from the government, industry sources said. The new banks would join nine of the largest American banks, including Bank of America and J.P. Morgan Chase, which were forced to accept $125 billion in funding last week.
Separately, the Treasury's plan to buy mortgage-related assets from banks appears to have stalled, industry sources said. Banks say that basic questions about the plan remain unanswered. Applicants to serve as asset managers have received little additional information from the Treasury in about a week, the source said. It is not clear, for example, whether banks that manage assets can also sell assets to the government.
The latest developments underscore the sea change in the Treasury's approach to its $700 billion bailout of the financial industry. The asset-buying plan pitched to Congress starting last month has been set aside in favor of an initiative to invest at least $250 billion in banks, and possibly more, with almost no restrictions on how the banks can use the money.
Treasury officials said yesterday that there would be no delay in the auction process and declined to comment on plans to announce more bank investments.
The sources cautioned that the list of participants and the amounts of money were not final as of last night. They spoke on condition of anonymity because they were not authorized to speak for the participating institutions.
The announcement of new participants in the bank investment plan, including Utah-based Zions Bancorporation, is intended to reassure the public, politicians and investors that the Treasury is making progress, the sources said. It is also meant to show that regional banks are now volunteering to participate and to help jump-start the economy. Regional banks are major lenders to mid-size companies.
But progress remains halting. The Treasury has yet to give federal money to the first nine banks because of continued legal wrangling over the details of the investment agreements. Assistant Treasury Secretary Neel Kashkari, the official responsible for the program, said in testimony before Congress yesterday that the next round of banks probably wouldn't get funding for "a few weeks."
Banks that accept government investments must agree in return to issue the government shares of preferred stock, which pay annual interest of 5 percent, and warrants for shares of common stock, which allow the government to profit as the company's share price rises. Banks also must accept limits on executive compensation and cannot raise dividends without permission.
Officials have publicly urged companies to increase their lending, to help revive the economy, but they privately concede that they cannot force banks to lend. Indeed, officials argue that for some institutions, the best use of the money may be plugging holes in the balance sheet or buying weaker banks.
The sources said that at least one bank that applied for funding was denied by the government. As a result, banks that receive money are hoping investors will view the federal funding as evidence of good health. At the same time, investors may punish large regional banks that seem conspicuous by their absence from the next round of federal investments.