Paulson Is Said to Plan Buying Stakes in Regional U.S. Banks

By Robert Schmidt

Oct. 24 (Bloomberg) -- Treasury Secretary Henry Paulson is preparing to take stakes in a number of regional U.S. banks as he seeks to halt the freeze of credit to businesses and households, according to a person briefed on the matter.

The Treasury may announce the plans as soon as today, the person, who was briefed by bankers and Treasury officials, said on condition of anonymity. The purchases would be the second round in a $250 billion program to inject capital into financial companies, after an initial $125 billion was allocated to nine of the largest banks.

Regional lenders, already suffering from the housing slump, are now getting hit by rising loan delinquencies as the economic downturn deepens, with unemployment at a five-year high. The 19- member Standard & Poor's 500 Banks Index has lost half its value in the past year.

``We're going to give them initial indications very quickly,'' Neel Kashkari, the interim Treasury assistant secretary running the department's financial-rescue office, told lawmakers yesterday, referring to the next group of banks to get government stakes. ``It will be a few weeks before the next batch are actually funded,'' he told the Senate Banking Committee.

The decision to buy stakes in more lenders comes after some of the mid-sized American financial institutions report mounting losses. National City Corp., Ohio's largest lender, Oct. 21 posted a wider loss, put aside more money for unpaid loans and announced plans to eliminate 4,000 jobs. Its third-quarter net loss widened to $729 million, from $19 million a year earlier.

SunTrust Seeks Funds

SunTrust Banks Inc., Georgia's largest lender, posted a 26 percent decline in third-quarter profit yesterday. The bank's board authorized the sale of $1.6 billion to $4.9 billion in preferred shares to the U.S. Treasury, Chief Executive Officer James Wells said in a conference call.

Paulson's focus on injecting funds into banks is a shift away from his initial emphasis on unclogging balance sheets by purchasing troubled mortgage-backed assets from financial institutions. Last week, the Treasury agreed to take stakes in nine firms including Citigroup Inc., Morgan Stanley and Bank of America Corp.

Congress three weeks ago approved a $700 billion rescue package that gave the Treasury wide authority to buy and guarantee assets to prevent a U.S. financial collapse.

Equity purchases ``are on the front burner and the heat is under the pot,'' said Wayne Abernathy, a former Treasury official who is now an executive vice president with the American Bankers Association, a group that represents lenders of all sizes.

`Markets Deteriorated'

Paulson had to shift gears because ``markets deteriorated much more quickly than we had expected,'' Kashkari, a 35-year-old former Goldman Sachs Group Inc. banker, told lawmakers. Taking stakes in banks offered a faster way to inject funds, he said.

The person briefed on the matter didn't identify the financial companies getting the next round of money, or specify the total amount. Firms have until Nov. 14 to apply for government funds, though the department has indicated it may extend that for some, such as those that are privately held.

The Treasury's plans to buy devalued assets such as mortgage- linked bonds and collateralized debt obligations are weeks, though ``not months'' away from being put into effect, Kashkari said.

Congress gave the Treasury 45 days, or until mid-November, to publish guidelines for how it would identify, value and purchase the assets. A Treasury official said then that it would take at least four weeks until the first auction was set up in an effort to price the toxic securities.

Search for Managers

While the Treasury picked Bank of New York Mellon Corp. to keep the books for the purchases, it is still completing a review of more than 100 bids to serve as asset managers, Kashkari said.

The aim of the asset purchases is to help restart a market for the securities, providing benchmark prices and inducing private capital to return.

Both Republicans and Democrats on the banking panel yesterday urged the Treasury to use its new authority -- and a chunk of the bailout money -- to help the millions of American homeowners who are facing foreclosure.

The Bush administration hasn't shown ``the required dedication'' to curb mortgage foreclosures, Christopher Dodd, the Connecticut Democrat who chairs the Senate banking panel, said at yesterday's hearing. Richard Shelby, the committee's top Republican, said that unless the government deals with housing problems, ``we're going to be wasting a lot of money.''

Kashkari told the panel that the Treasury is ``looking very hard'' at a proposal by Federal Deposit Insurance Corp. chief Sheila Bair to use federal loan guarantees to entice mortgage servicers to modify loans.

Bair's agency is developing experience in changing mortgages to make them more affordable after taking over IndyMac Bancorp Inc., the failed lender seized by regulators in July. The Treasury could offer ``loan guarantees and credit enhancements'' to help persuade the holders of home loans to modify them, Bair told the Senate committee yesterday.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net