The United States (US) yesterday made its most aggressive move so far to tackle the financial crisis, unveiling a plan to inject about US$250 billion of public money into the US banking system as part of its US$700billion rescue package agreed earlier this month.
After securing the participation of nine large banks, including Citigroup and JPMorgan Chase, at a Treasury Department summit on Monday, the administration rolled out the terms at which it was prepared to plough money into a much vaster array of US lenders.
“Government owning a stake in any private US company is objectionable to most Americans – me included,” said Hank Paulson, Treasury Secretary. “Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”
Financial institutions would have until mid-November to decide whether they want to participate in the Government recapitalisation scheme. The minimum capital injection will be 2 per cent of risk-weighted assets and the maximum will be 3 per cent of risk-weighted assets, with an overall cap at US$25 billion.
The Treasury would be taking non-voting preferred shares in the banks, redeemable after three years. The securities would pay an annual dividend rate of 5 per cent for the first five years which will rise to 9 per cent after that and the Government would receive warrants to convert them into common stock.
There would also be some restrictions on executive compensation at the companies participating in the programme.
The decision to take equity positions in US banks represents a dramatic shift in the original purpose of the US$700 billion financial rescue plan passed by Congress early this month.
Both the Treasury Department and most legislators had expected the Government to use the money primarily to buy troubled assets from financial institutions. But as the crisis escalated in recent days, a more radical approach was sought.
