Paulson Urges Banks to Deploy Capital to Spur Economy

By Rebecca Christie and Robert Schmidt

Oct. 14 (Bloomberg) -- Treasury Secretary Henry Paulson urged banks receiving $250 billion in capital injections from the government to use the funds to spur economic growth.

``We must restore confidence in our financial system,'' Paulson said at a press conference in Washington. ``The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.''

With the equity purchases, Paulson is using more than a third of the $700 billion in government support Congress gave him the authority to use on Oct. 3. He didn't identify any of the lenders. People familiar with the plan said nine companies will get $125 billion: Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp.

``These are healthy institutions, and they have taken this step for the good of the U.S. economy,'' Paulson said. Stocks rose around the world on expectations the rescue will help alleviate the credit crisis.

Paulson made the remarks in advance of a press conference in Washington with Federal Reserve Chairman Ben S. Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair.

Paulson said the Treasury will dedicate $250 billion for boosting bank capital through preferred stock purchases. The regulators said in a statement that ``thousands'' of financial companies would participate.

Pay Limits

Participating banks will need to accept limits on executive pay and so-called golden parachute payments. They also will need to give the Treasury warrants for an amount equal to 15 percent of the senior preferred investment, with a strike price determined by the bank's share price at the time of issuance.

The senior preferred shares will pay a dividend of 5 percent for the first five years and 9 percent after that, the Treasury said. The purchase price of the stock will be the market price of the banks' common shares at the time of the transaction. Companies will be able to buy back the equity at par after three years.

The U.S. initiative followed an announcement that France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion to guarantee bank loans and take stakes in lenders.

Europe's Dow Jones Stoxx 600 Index today climbed 5.2 percent. The MSCI Asia Pacific Index surged 9.3 percent today, the most since 1998, with Japan's Nikkei jumping 14 percent as trading resumed following yesterday's public holiday.

IMF Estimates

Last week, the International Monetary Fund estimated that banks around the world would need $675 billion in fresh capital over the next several years to recover. The IMF also said Oct. 7 that losses tied to U.S. loans and securitized assets would total $1.4 trillion, an almost 50 percent increase from a prediction in April.

The move marks a change in the Treasury chief's strategy to alleviate a global credit crunch after he initially said the focus of the plan would be buying up illiquid mortgage-related assets. Banks have struggled to regain the confidence of investors, counterparties and clients after bad loans caused $637 billion of writedowns and losses across the industry.

``This is an essential short-term measure to ensure the viability of the U.S. banking system,'' President George W. Bush said at the White House after meeting with his Working Group on Financial Markets, which includes Paulson and Bernanke.

To contact the reporter on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net. Robert Schmidt in Washington at rschmidt5@bloomberg.net.