Treasury begins to deploy financial rescue plan

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(Agencies)
Updated: 2008-10-27 23:52

WASHINGTON -- The government will begin doling out US$125 billion to nine major banks this week as part of its effort to contain a growing financial crisis, a top Treasury official said Monday.

US Treasury Secretary Henry Paulson speaks at a news conference after the G7 Ministerial meeting in Washington October 10, 2008. The world's rich nations vowed on Friday to take all necessary steps to unfreeze credit markets and ensure banks can raise money but they offered no collective course of action to avert a deep global recession. [Agencies]

Assistant Treasury Secretary David Nason said the deals with the nine banks were signed Sunday night and the government will make the stock purchases this week. The deals are designed to bolster the banks' balance sheets so they will begin more normal lending.

The action will mark the first deployment of resources from the government's US$700 billion financial rescue package passed by Congress on Oct. 3.

The bailout package has undergone a major change in emphasis since it was passed by Congress. Treasury Secretary Henry Paulson decided to use US$250 billion of the US$700 billion to make direct purchases of bank stock, partially nationalizing the country's banking system, as a way to get money into the financial system more quickly.

As the rescue program wended its way through Congress, the administration emphasized that the money would be used to purchase bad assets of banks. That effort has yet to get started although the administration expects to use US$100 billion to purchase bad assets in coming months.

The deployment of the first US$125 billion to the major banks had been delayed while the government and the banks worked out the details for the purchases.

Nason, a key architect of the rescue plan, said in an interview Monday on CNBC that those agreements had been signed late Sunday night.

Treasury is also starting to give approval to major regional banks with the goal of getting another US$125 billion in stock purchases made by the end of this year.

One of those banks, KeyCorp, said Monday it would issue stock for a US$2.5 billion infusion of capital from the government.

Another major bank, PNC Financial Services Group, announced on Friday it was acquiring National City Corp. It was the first instance of a bank using resources it has been told it will receive from the government's stock purchase program to support an acquisition of another bank. PNC said it is in line to get US$7.7 billion in cash from the government by selling stock and warrants to the government under the rescue program.

Treasury has given the go-ahead for stronger banks to use the money it receives in the rescue program to acquire weaker banks, prompting critics to say the government should not be financing the consolidation of the banking system - in effect helping to choose winners and losers.

Nason, asked about this issue Monday, said the administration's major aim is to stabilize the financial system and that stronger institutions will be in a better position to make loans and support the overall economy.

Nason also confirmed the Treasury Department is reviewing a number of requests from a range of U.S. industries for help from the bailout program. Representatives of insurance companies, auto companies and foreign-controlled banks have all petitioned for help from the US$700 billion fund.

Nason did not indicate when decisions on those requests might be made. He said one of the issues that Treasury had to consider was that in helping banks, which are federally regulated, the Treasury could tap into the knowledge of federal regulators in making decisions on how much money to supply and to which institutions. That type of information would not be available for non-federally regulated institutions, Nason said.