First batch of bailout money for US banks moving soon

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(Agencies)
Updated: 2008-10-28 09:11

The Fed was expected to make an even more dramatic move later this week by cutting interest rates, perhaps lowering the key federal funds rate by as much as a half-point, driving the federal funds rate down to 1 percent.

The question is whether all the efforts, including billions of dollars of loans to banks by the Fed and other central banks around the world, will be enough to get lending going again.

So far, it hasn't helped much. A closely watched measure that tracks what banks charge each other for loans, edged down marginally on Monday, suggesting credit is a bit looser than a few weeks ago but remains tight.

"All these efforts are doing some good, but the question is whether they will do enough," said David Wyss, chief economist for Standard & Poor's in New York. "The credit markets are still pretty locked up."

Besides pumping money into the banking system, Treasury Secretary Henry Paulson and other Treasury officials are considering a round of requests for help from other industries, including big insurance companies, automakers and foreign-controlled banks.

Presidential press secretary Dana Perino told reporters Monday that the financing arms of the automakers might be eligible for federal help. She said the Bush administration was also working quickly to release $25 billion in loans approved by Congress last month to bolster the beleaguered auto sector by providing support for car makers to develop new energy-efficient vehicles.

The broader bailout package has undergone major changes since it was passed by Congress. Global markets staggered, forcing other countries to rush to the aid of their own banks, and Paulson decided U.S. banks needed even more urgent help.

The original idea behind the bailout was to buy up bad mortgage-related debt off the books of banks, but only $100 billion has been set aside to do that this year. The government announced plans Oct. 14 to buy direct stakes in the banks.

Among the regional banks, KeyCorp said it would issue stock for a $2.5 billion infusion from the government, and SunTrust Banks said it has received preliminary approval from Treasury for $3.5 billion.

In return for its infusion of new money to bolster bank balance sheets, Treasury will get preferred shares paying a 5 percent return initially and warrants to purchase common shares, allowing taxpayers to benefit once the banks' recover. However, Treasury does not get any voting rights with its ownership stake and will not be able to have a say in choosing the bank's board of directors.

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

Karen Thomas, the executive vice president for the Independent Community Bankers of America, which represents the country's 8,000 smaller banks, said her group supported efforts to consolidate troubled banks with stronger ones but did not believe it was proper to pick winners among healthy banks.

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