U.S. may convert bank bailout to equity share: report

Obama administration officials have determined they can avoid asking Congress for more bank bailout funds by converting existing loans to the largest U.S. banks into common stock, The New York Times reported on Sunday.

President Barack Obama's top economic advisers now say such a conversion would let them stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, the paper said, citing administration officials it did not identify.

Converting the loans to the 19 biggest U.S. banks into common shares would turn the government aid into available capital and give the government a large equity stake in return, the newspaper said.

Some critics would consider the option a back door to nationalization since the government could become the largest shareholder in several banks, the report said.

The U.S. Treasury Department estimates it has about $134.5 billion remaining in the $700 billion financial rescue fund approved by Congress in October.

The change to common stock would not require the government to contribute any additional cash, but it could increase the capital of big banks by more than $100 billion, the newspaper said.

Asked about the report, a Treasury Department official pointed to an agency paper on the aid program without elaboration. A section of the so-called White Paper reads: "The capital provided to eligible banking organizations under this program will be in the form of a preferred security that is convertible into common equity."

White House Chief of Staff Rahm Emanuel said on ABC's "This Week with George Stephanopoulos" on Sunday that the administration thinks it can avoid nationalizing U.S. banks.

A major challenge for the U.S. economy is to restore confidence that its banks are now sufficiently capitalized after huge losses from the collapse of the housing market.

Obama's economic team is conducting stress tests of the top 19 U.S. firms and will issue guidelines on the process on Friday, with results due on May 4.

"We believe we have those resources available in the government as the final backstop to make sure that the 19 are financially viable and effective," Emanuel said. "If they need capital, we have that capacity."

[Source: Reuters, Washington, 20Apr09]

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