Treasury says big banks can get more bailout funds

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Treasury says big banks can get more bailout funds

Treasury says biggest banks can have immediate access to further support from bailout fund

• Martin Crutsinger, AP Economics Writer

WASHINGTON (AP) -- The nation's biggest banks are being granted immediate access to further support from the government's $700 billion financial rescue fund.


Treasury Department officials said Wednesday the new support will be provided through the government's purchase of preferred shares of the bank stock that are convertible into common shares at a 10 percent discount to their price before Feb. 9.

The preferred shares will carry a 9 percent dividend and be convertible at the bank's option, but subject to regulatory approval.

The option to convert the preferred shares into common shares is a change in the rescue program designed to give financial markets greater confidence.

Common shares absorb losses before preferred shares do, which means that under a stock-conversion plan taxpayers would be on the hook if banks keep writing down billions of dollars' worth of rotten assets, such as dodgy mortgages, as many analysts expect they will.

However, common stock in banks is incredibly cheap, and taxpayers would reap gains if the banks come back to health and the stock price rises.

The Treasury Department also provided details of how a new stress test will function to ensure banks have enough capital to survive a downturn that would be even more severe than the current recession.

The stress tests will use two economic scenarios to gauge banks' health and are expected to be completed by the end of April.

The results will help regulators decide whether banks may need additional assistance so they can carry out the critical mission of boosting lending to customers, a key ingredient to the economic turnaround.

The "baseline" scenario envisions the nation's gross domestic product, which is the value of all goods and services produced within the U.S. and the broadest barometer of the country's economic health, falling 2 percent this year, unemployment rising to 8.4 percent and home prices dropping 14 percent.

The "adverse" scenario assumes GDP will drop 3.3 percent, unemployment rising to 8.9 percent and home prices falling 22 percent this year.

For all of 2008, GDP rose 1.3 percent, which was the smallest increase since 2001. In the fourth quarter, GDP fell 3.8 percent, the biggest contraction since 1982.

The unemployment rate last month surged to 7.6 percent, the highest in more than 16 years. It was 5.8 percent last year, the highest since 2003.
Median home prices in the U.S. fell 9.5 percent last year, according to the National Association of Realtors, though many big cities like Los Angeles, Las Vegas and Miami showed far larger declines.

AP Business Writers Jeannine Aversa and Alan Zibel contributed to this report.

http://finance.yahoo.com/news/Treasu...-14468316.html