Executives at Baltimore's regional banks said they're hopeful that the federal government's plan to buy stakes in banks will help ease the economic crisis by stimulating lending and restoring consumer confidence in the financial system.
Under the voluntary plan announced yesterday, the U.S. Treasury Department will purchase as much as $250 billion of preferred stock in up to thousands of small to large banks and thrifts as a way to spur lending to consumers and businesses.
At a time of heightened anxiety about the stability of financial institutions, some banking officials and experts welcomed the action.
"It's given us some cause for optimism," said Edwin F. Hale, chairman of Baltimore-based First Mariner Bank, which has seen its profit pulled down by losses on bad real estate and construction loans. "We're going to go after it vigorously."
The worsening economic crisis has brought down investment banks, sent stocks plummeting and prompted many Baltimore-area banks to launch unprecedented campaigns to reassure customers about the safety of their deposits. Last week, the FDIC raised its cap on federally insured deposits to $250,000 from $100,000.
It's still unclear how much capital will be available for each financial institution based on yesterday's announcement by government officials, including Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke. But Joseph Cicero, First Mariner's chief operating office, said that such an infusion would help bolster capital ratios, and "you will be able to lend more comfortably."
Other banks said they were still digesting the details of the plan.
"From the bank's standpoint ... these dramatic steps were necessary to instill more confidence in the financial markets," said Vicki Cox, a spokeswoman for Provident Bank, the Baltimore area's largest Maryland-based bank. Provident executives will study the plan, she said, and decide whether the proposal makes sense for the bank.
A representative of The Columbia Bank said the institution has not decided whether to participate, although he said it was unlikely.
"We've been able to manage our way," said Mike Galeon, an executive vice president. But, he said, "I do believe this approach has to be done to right the ship [out] of the predicament we're in with the financial industry."
Paulson said the government plans to use more than a third of the $700 billion bailout funds to purchase bank shares. Banks that participate would need to accept restrictions on executive compensation. He said taxpayers would own shares that should be paid back with a reasonable return and will receive warrants for common shares.
"Our goal is to see a wide array of healthy institutions sell preferred shares to the treasury, and raise additional private capital, so that they can make more loans," Paulson said.
Paulson acknowledged that government ownership in companies is viewed as objectionable. But leaving businesses and consumers without access to financing would lead to business failures and job losses. He said the crisis has made investors unwilling to lend to banks and healthy banks unwilling to lend to each other as well as consumers and businesses.
Other steps announced yesterday include allowing the FDIC to temporarily guarantee new issues of bank debt - fully protecting the money even if the institution fails. And, the FDIC will start providing unlimited deposit insurance for non-interest bearing accounts, which are mainly used by businesses to cover payrolls and other expenses.
The preferred stock purchase program "puts new capital into the banks at a relatively low cost," said Gary Townsend, a former bank regulator and bank analyst and now president and chief executive of Hill-Townsend Capital LLC in Chevy Chase.
During the past couple of weeks, regional banks and credit unions have stepped up efforts to reassure jittery customers that their money is safe and federally insured. Many companies are using advertising, letters to customers and other campaigns to get their messages out.
Northwest Saving Bank, which has five branches in the Baltimore area, began using print advertisements last week saying the company "continues to be a financially strong, safe haven for your hard-earned FDIC-insured dollars."
Jim Holding, a vice president of marketing for Northwest, said the bank launched the campaign because "People are worried, despite the fact that FDIC insurance is up to more than double. We're trying to tell them the FDIC is not their first line of defense; the bank is the first line of defense."
The Associated Press contributed to this article
President Bush announced yesterday a $250 billion plan for the government to buy shares in the nation's leading banks. Nine banks will take part initially, with potentially thousands of others to follow. Treasury Secretary Henry M. Paulson Jr. wanted healthy institutions to go first, to remove any stigma associated with such bailouts.
The first bank to take advantage of the program was Bank of New York Mellon, which said it would sell $3 billion in preferred shares to the Treasury.
What it hopes to accomplish: Banks may now have more confidence to lend to other banks and to consumers and businesses. If they don't, the U.S. could be facing a painful recession.
What's next: Once the financial markets stabilize and recover, the banks are expected to buy the stock back from the government, Bush said. The Federal Reserve said its plan to buy vast amounts of short-term debt, to try to unclog the credit pipeline and provide corporate funding, will start Oct. 27.