Plan to keep banks afloat

McClatchy Newspapers

WASHINGTON — Amid growing concerns that the U.S. government may be forced to take over large parts of the banking system, five federal regulators issued a joint statement Monday announcing the creation of a special lifeline to keep troubled banks afloat, but they rejected outright nationalization.

The Treasury Department, the Federal Reserve and three other bank regulators said the government would make available to banks, on a temporary basis, capital needed to buffer against bigger-than-anticipated losses.

The money comes from the Capital Assistance Program, a bank rescue plan that the Obama administration announced Feb. 10, which spooked the markets because it lacked details.

“This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis,” the regulators said in their statement, in wording designed to signal that this wasn’t bank nationalization.

The regulators closed their statement with even more explicit language that tried to calm markets’ fears that the government of the world’s largest economy might be forced to take over private banks:

“Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.”

The statement followed news reports over the weekend that Citigroup is negotiating with regulators to have the U.S. government take a stake, as high as 40 percent, in the storied bank. If so, it would be the third government intervention in Citigroup since October.

As was the case in the earlier rollout of financial rescue plans, the Obama administration struggled Monday to explain its new program. News reports were all over the map because of confusion over what the new program did or didn’t do, and many financial-industry executives hadn’t been informed about the latest effort.

Financial markets should have seen the announcement as positive, but the administration’s lack of a coherent message to explain what it meant and how it works sent the Dow Jones Industrial Average into a nosedive.