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Gov-Bank? Not Quite

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  • Gov-Bank? Not Quite

    I am putting this article here for future reference. I have found that the gov usually says one thing and does another, so I wanted to have this article as a reference. ;)

    Gov-Bank? Not quite
    By MADLEN READ – 32 minutes ago

    NEW YORK (AP) — The U.S. government may be tightening its grip on the banking system, but don't expect it to change your branch's hours, tack fees onto your account or overhaul your bank's Web site.

    The federal government doesn't want to be running banks' daily operations, financial analysts say. Not only would it rub Americans raised on free-market values the wrong way, but the task would also be too massive and complicated.

    That's not to say there won't be big changes made by the government at banks like Citigroup Inc. — a company that is shrinking drastically. But many of the changes consumers are likely to see will be made by the banks themselves to save money — already, Citigroup, Bank of America Corp., JPMorgan Chase & Co. and others have been hiking credit card rates.

    The government's growing influence over certain financial institutions will probably not be noticeable to average customers making deposits, getting mortgages or signing up for cards — unless regulators decide a bank needs to sell branches to another institution.

    "We're not going to end up with Citi as a government-owned banking utility. I just don't see it," said Bert Ely, an independent banking industry consultant in Alexandria, Va. "What this company faces are very major strategic issues: What businesses it's going to sell, what its top management will be. None of this is going to come down to the branch level."

    Regulators said Monday they are considering boosting government ownership in financial institutions, but stopping short of nationalizing them. The biggest recipient of such a program is apt to be Citigroup, which recently approached regulators about ways the government could bolster the bank, including a stock conversion plan, according to people familiar with the discussions. They spoke on condition of anonymity because they are not authorized to speak on behalf of the government or the company.

    Celent banking analyst Bart Narter said the government wants to avoid being in the banking business, though, and instead is trying to "stabilize Citi, and winnow it down to something manageable."

    "In a year," Narter said, "Citi will be an extremely changed entity to the point where its own mother wouldn't recognize it."

    Citigroup, having suffered five straight quarterly losses, has already split into two organizational structures, Citicorp and Citi Holdings. Citicorp will focus on traditional banking around the world, while Citi Holdings will manage the company's riskier assets and more complex businesses. These Citi Holdings assets are expected to be sold off to raise capital. So far, the company has already sold control of its Smith Barney brokerage, its German retail bank operations and other divisions for cash.

    Eventually, with more prodding by the government, "you'll be back to the old Citibank that John Reed ran. Everything else will be gone," said William Smith, CEO of Smith Asset Management, which owns Citi shares. John Reed was CEO of the commercial bank Citicorp before it merged with Sandy Weill's financial services company Travelers Group in 1998 to become the massive conglomerate known today as Citigroup.

    For Smith, more government control of Citigroup is a positive move.

    "This is the first time you'll ever hear me say this, but I'm in favor of the government being a shareholder with me," Smith said, adding that the Treasury Department is already exerting a great deal of power over Citigroup management. "They are more friend than foe. We needed a grown-up there."

    Analysts say the government could replace executives and board members, as it did with the ailing insurer American International Group Inc.

    If there is any change at the consumer level, it could be a helpful one: More loans.

    "It's hard to say, 'Typically, this is what happens,' because it's uncharted territory," said Aite Group analyst Alois Pirker. But when it comes to the government's agenda of boosting lending, Pirker said, "it's hard for me to imagine that it wouldn't use this opportunity to interfere at some level ... It might be a little easier to get to loans."

    To be sure, no one is expecting mortgages, cards or other forms of credit to bounce back to pre-meltdown levels. No matter how heavy-handed the government becomes, the U.S. banking system will be feeling the effects of the weak economy for many years to come, analysts say — and that means strict underwriting standards.

    And it's possible that more drastic changes will occur for consumers if the government eventually withdraws its support. A wave of consolidation in the banking industry has been turning Washington Mutual customers into JPMorgan Chase & Co. customers; Wachovia customers into Wells Fargo & Co. customers; and National City customers into PNC Financial customers.

    "At some point, not immediately," said NAB Research analyst Nancy Bush, "the government is going to say, 'OK, we stabilized you — now it's time to go find a partner'."

    AP Business Writer Ieva M. Augstums in Charlotte, N.C. and AP Economics Writer Jeannine Aversa in Washington contributed to this report.

  • #2
    Regulators in United States Pledge to Shore up Financial System

    Regulators in United States pledge to shore up financial system
    Monday, February 23rd, 2009

    WASHINGTON - U.S. regulators said Monday they will launch a revamped program to shore up the country's troubled banks that includes the option of increasing government ownership in financial institutions.

    The new plans are the Obama administration's latest attempt to bolster the strength of the banking system without nationalizing any institutions, which the White House has said it does not intend to do.

    The U.S. Treasury Department, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Office of Thrift Supervision and the Federal Reserve jointly issued the statement amid growing concern that some of the country's biggest banks may need additional assistance to survive the fallout from the worst financial crisis since the 1930s.

    The new program - a crucial component of President Barack Obama's strategy for handling the US$700-billion financial bailout - would give the government greater flexibility in dealing with troubled banks.

    In a new twist, regulators have the option of allowing the government to boost its ownership in banks without having to pour more taxpayer money into them. That would be done through a technical change converting the status of the government's shares in a financial institution.

    Citigroup Inc. has approached banking regulators about ways the government could help strengthen the bank, including the stock conversion plan, according to people familiar with the discussions. They spoke on condition of anonymity because they are not authorized to speak on behalf of the government or the company. A Citigroup spokesman declined to comment Monday afternoon.

    Still, the regulators suggested keeping banks private is a priority.

    "Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption (of the program) is that banks should remain in private hands," the regulators said.

    The new federal program, like the old one, will allow the government to continue to inject more taxpayer money, or capital, into a bank, in an effort to ride out the financial storm. Of the first $350 billion in bailout funds, $250 billion was used to provide capital injections to banks, including Citigroup, Bank of America Corp. and others. But the Obama administration has not said how much of the second $350 billion will be used for that purpose.

    The regulators on Monday did not name any specific banks or respond to reports that the government was considering increasing its ownership of Citigroup.

    The White House just last week downplayed persistent speculation that some banks could be effectively nationalized by the federal government.

    "A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery," the regulators said. "The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses."

    A revamped program, announced by Treasury Secretary Timothy Geithner earlier this month, to plow federal money into banks in return for giving the government ownership stakes will start Wednesday.

    Regulators provided some details on that program Monday.

    "Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory," the regulators said.

    Such a conversion into common stock would give the federal government more control of a bank - without necessarily having to put up more taxpayers' dollars and could be applied retroactively to banks that already have received billions in capital injections. The banks also benefit because preferred shares pay higher dividends so converting them into common shares will help ease their repayment burden.

    Such an option is being considered for Citigroup but also could be available for other banks as well, according to people familiar with the new capital injection program. They spoke on condition of anonymity because they are not authorized to speak for the government.

    When asked about reports that the government was considering increasing its ownership of Citigroup, Treasury spokesman Isaac Baker said the department did not comment on conversations with specific banks.

    "We've made clear that we will do what is necessary to strengthen and stabilize the financial system so that it can provide the credit necessary to support economic recovery," Baker said in a statement.

    The government is open to considering a request to convert preferred shares purchased as part of its $700-billion rescue program into common stock "if the institution and its regulator believe it would promote the long term stability of that institution and we believe it's in the best interest of long term stability of our economy and financial system," Baker said.

    The Wall Street Journal reported late Sunday that Citigroup was in talks with federal officials over the possibility of the government expanding its ownership of the struggling bank to as much as 40 per cent of its common stock. The newspaper said bank executives hope the stake will be closer to 25 per cent.

    Shares of Citigroup added 18 cents, or 9.2 per cent, to $2.13 in Monday afternoon trading. The New York company's stock has traded between $1.61 and $27.35 in the past year.

    The new capital injection program will require banks to under go "stress tests" to examine their financial health and determine whether additional capital is needed. Details on how these tests will work may be provided Wednesday, the people familiar with the plan said.

    "Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized," the regulators said. However, as part of the stress tests, banking examiners will be looking closely at both the quality and quantity of capital.

    Also Monday, Geithner will join Obama and other guests at a fiscal responsibility summit at the White House to discuss how to curb a burgeoning federal deficit laden with Social Security, Medicare and Medicaid obligations.


    AP Economics Writer Martin Crutsinger contributed to this report.