U.S. Is Pressed to Add Billions to Bailouts


(February 24, 2009)
The government faced mounting pressure on Monday to put billions more in some of the nation’s biggest banks, two of the biggest automakers and the biggest insurance company, despite the billions it has already committed to rescuing them.

The government’s boldest rescue to date, its $150 billion commitment for the insurance giant American International Group, is foundering. A.I.G. indicated on Monday it was now negotiating for tens of billions of dollars in additional assistance as losses have mounted.

Separately, the Obama administration confirmed it was in discussions to aid Citigroup, the recipient of $45 billion so far, that could raise the government’s stake in the banking company to as much as 40 percent.

The Treasury Department named a special adviser to work with General Motors and Chrysler, two of Detroit’s biggest automakers, which are seeking $22 billion on top of the $17 billion already granted to them.

All these companies’ mushrooming needs reflect just how hard it is to stanch the flow of losses as the economy deteriorates. Even though the government’s finances are being stretched — and still more aid might be needed in the future — it is being forced to fill the growing holes in the finances of these companies out of fear that the demise of an important company could set off a chain reaction.

The deepening global downturn is dragging down all kinds of businesses, and, with no bottom to the recession in sight, investors sent the the Dow industrials down 250.89 points, or 3.7 percent, to 7,114.78, a 3.7 percent drop for the day and a loss of about 50 percent from their peak in the fall of 2007. Asian markets followed suit on Tuesday by flirting with the lows they hit last October, with stocks in Hong Kong dropping more than 3 percent, and Japan's Nikkei 225 index dropping more than 2 percent before rebounding slightly.

In an unexpectedly assertive joint statement after two weeks of bank stock declines, the Treasury Department, the Federal Reserve and federal bank regulatory agencies announced that the government might demand a direct ownership stake in major banks that do not have enough capital to weather a deeper downturn. The government will begin conducting a test of the banks’ financial health this week.

Administration officials emphasized that nationalizing any of the major banks was their least favorite solution to the banking crisis, but they acknowledged that some banks might be both too big to fail and too fragile to endure another round of shocks without substantial help.

Banks that fail the test will have to raise additional capital. If they are unable to raise capital in the private market, they would have to take money from the government in exchange for preferred stock that would be convertible into common shares, thus giving the government a bigger stake.

The administration is debating how big a role to play in the auto businesses, what concessions the companies should make in return for aid and whether bankruptcy should be considered, though it prefers a private sector solution.

On Monday, Steven Rattner, co-founder of a private equity firm, the Quadrangle Group, was named an adviser to the Treasury on the auto industry.

As the administration takes bigger stakes in companies, the value held by existing shareholders is being diluted, which could make it even harder to attract private money in the future.

Timothy F. Geithner, the secretary of the Treasury, recently outlined a bank recovery plan that included a program to attract a combination of public and private money to buy troubled mortgages and other assets.

A.I.G. serves as a cautionary note about the difficulty of luring private investors when the size of the losses is unknown. In the months since the government initially stepped in last fall to take an 80 percent stake in the insurer, the company has suffered deepening losses and has been forced to post more collateral with its trading partners.

The company, according to a person close to the negotiations, is discussing the prospect of converting the government’s $40 billion in preferred shares into common equity.

The prototype could turn out to be Citigroup, which is negotiating with regulators to replace the government’s nonvoting preferred shares with shares that are convertible into common stock.

“We absolutely believe that our private banking system is best off being in private hands and we are trying our best to keep it that way,â€