February 6, 2009

U.S. officials are examining ways to convert government stakes in banks into ordinary shares as banks accumulate losses, the Financial Times said, citing people close to the discussions.

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Policymakers are considering an idea that the government change its existing holdings in the banks, which have taken the form of preferred shares — non-voting stock that carries a fixed dividend — into convertible preferred shares that could be converted into common stock, the paper said.

Under this proposal, the shares would automatically convert into common equity if there was a decline in the bank’s health, as measured by its tangible equity ratio, for example, the paper reported.

The government may also make future capital injections in the form of such convertible preferred shares, the paper said.

The Obama administration is considering an expansion of the Federal Reserve’s consumer-lending facility, known as the Term Asset-Backed-Securities Loan Facility (TALF) that could potentially buy up toxic assets clogging the system, the Wall Street Journal said, citing people familiar with the plans.

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