Treasury Likely to Take Bank Equity Stakes

The U.S. Treasury will use a portion of the Troubled Asset Relief Program (TARP) to take equity stakes in financial institutions, according to the White House.

The Treasury will inject capital into companies in exchange for "an equity stake", the U.S. President's chief spokesperson, Dana Perino, said Thursday.

"(Treasury) Secretary (Henry) Paulson is looking at all the different tools to figure out which ones should be used at what time and how robustly and how much money to put into each," Perino added.

The New York Times first reported Paulson was considering the move. Other news agencies later revealed details of the plan.

It is expected to be a voluntary program that includes the purchase of non-voting preferred shares. It will be implemented near the end of the month.

The recently-passed $700 billion TARP gives the Treasury the authority to make such a move. At the moment, Paulson is assembling a team to run the program. The Treasury will initially release $250 billion, followed by $150 billion at the discretion of U.S. President George W. Bush, and the remaining $300 billion next year.

It was originally believed the Treasury would use its authority to buy mortgage-backed securities from institutions. Reports suggest a variety of options are still being considered.

Financial institutions are having increasing difficulty raising capital. Earlier this week, Bank of America experienced some difficulty to raise $10 billion and saw its share price tumble. Goldman Sachs turned to billionaire investor Warren Buffett for $5 billion, but will have to pay 10% interest on the perpetual preferred shares that can be redeemed at any time at $115 per share. Goldman shares are trading at $108 on Thursday.

The U.S. plan would mirror one announced by UK officials on Wednesday. They will inject up to US$87 billion into banks in exchanged for preferred shares.

By Adam Button and edited by Nancy Girgis
©CEP News Ltd. 2008