By Binyamin Appelbaum and David Cho
Washington Post Staff Writers
Tuesday, February 24, 2009; A01

The Obama administration yesterday revamped the terms of its emergency aid to troubled financial firms, setting a course that could culminate with the government nationalizing some of the country's largest banks by taking a controlling ownership stake.

Administration officials said the change, which allows banks to repay the government with common stock rather than cash, is intended to give banks more capital to withstand a continued deterioration of the economy, and not to nationalize the banking system.

But in seeking to bolster investor confidence in troubled companies such as Citigroup, the government said it is willing to acquire large chunks of their shares. .

The move is a significant gamble. The magnitude of the effort could underscore the severity of the crisis, further alarming investors. The government could also forego billions of dollars in dividend payments.

Some investors welcomed the announcement. Even as the Dow Jones industrial average fell 251 points to its lowest close since 1997, shares of Citigroup climbed 10 percent. Shares of another troubled firm, Bank of America, rose about 3 percent.

The change paves a road toward nationalization for the most troubled large banks. The government this week will begin a series of "stress tests" on 20 of the largest banks with $100 billion in assets to determine how much more capital these firms need to withstand an extreme recession.

Companies deemed to need more money will be required to raise it from private sources, or else accept additional government investments. If those investments are converted into common shares, even a relatively modest infusion of taxpayer money could give the government majority control of many banks because their stock prices have plummeted in recent months. The total value of Citigroup's outstanding shares, for instance, is less than $12 billion.

Administration officials said the goal of the revised program is to give banks a short-term boost that avoids the need for a more dramatic federal intervention.

What Treasury Secretary Timothy F. Geithner and his team want to avoid is an explicit takeover that would put the government in charge of running banks. But some senior officials have said that, as a last resort, they would consider taking temporary control of large banks. The government also could take a majority ownership stake in a company without attempting to manage its daily operations.

A wide range of prominent economists and public figures have called for the government to take this step. But a backlash is building against government ownership.

Sen. Charles E. Grassley (Iowa), ranking Republican on the Senate Finance Committee, sent Geithner a letter yesterday demanding details of the administration's plans. "Common stock is riskier than preferred stock. The American taxpayers are already shouldering a lot of risk these days," Grassley said in a statement. "This move could expose taxpayers to even more risk."

Even within the government, some senior officials say they are worried that Geithner's approach has left investors unsettled because of ambiguity over the administration's intentions.

The government has invested almost $200 billion in more than 400 banks under a program created by former Treasury Secretary Henry M. Paulson Jr. In exchange, the government received shares of preferred stock that paid an annual interest rate of 5 percent for five years.

The changes announced yesterday create a two-step process, officials said. Companies can replace the government's preferred shares with a new kind of preferred shares that will differ in at least one critical respect -- they can be converted into shares of the company's common stock. The company can request the conversion at any point during a specified period of several years, or else the shares will begin to gradually convert into common shares over time. If the company does not want to issue common shares to the government, it must buy back the government's preferred shares before the end of the period. Conversions will require the approval of banking regulators with final approval from the Treasury Department, a senior administration official said.

The change in terms could improve the health of banks without requiring the government to invest additional money.

Companies that convert the government's investment to common shares can reduce required dividend payments, allowing the largest banks to save billions of dollars. There is also an important accounting benefit that improves the value of the government's investment as a cushion against future losses.

Under accounting rules, banks are constrained in their ability to count the money raised by selling preferred shares under the narrowest definition of that capital cushion, called tangible common equity. Investors viewing banks with an increasingly jaundiced eye have increasingly favored that narrowest definition, and as a result, they have excluded the government's initial round of investments from their calculations of how much money banks hold in reserve. Issuing common shares would allow banks to improve their performance on that narrowest measure.

But if the government effort to revive the banks is unsuccessful, the change unveiled yesterday increases the risk that billions of dollars in taxpayer money could be lost. The Bush administration structured its investments to resemble loans, with regular dividends and some chance to recover money if a bank fails. Converting those investments into common shares reduces or eliminates the dividends and the protections, but it also allows taxpayers to benefit if companies return to profitability.

Scott Talbott, a spokesman for the Financial Services Roundtable, said the changes showed the government's support for the industry.

"This is a signal that the government believes the financial institutions are strong and provides them with the flexibility of terms should the economy worsen," Talbott said.

Citigroup pushed for the change in terms, according to people familiar with the matter. The company is walking a fine line between its need for explicit government support and its desire to remain independent.

The government already has invested $45 billion in Citigroup and promised to limit its losses on a portfolio of more than $300 billion of loans and other troubled assets. Senior Citigroup executives approached federal regulators to urge that the government convert parts of its investment to common shares, the sources said. The company hopes to reassure investors and attract new money.

David Dreman, chairman of Dreman Value Management, which as of the end of last year was among the top 70 stakeholders in Citigroup with more than 9 million shares, said he was comforted by the government's latest move yesterday. "It looks like the government is going to get them out of this. They're going to give them enough money so they don't go under," he said.

Brett Hammond, chief investment strategist at TIAA-CREF, another large Citigroup shareholder, said while a larger government stake would initially hurt existing shareholders, it would be better for them in the long run.

"I think you have to take the big view," he said. "It's better for the shareholders for government to take some action rather than no action. There's a much better chance that Citigroup will survive now and therefore live to pay dividends another day."

Staff writers Neil Irwin and Tomoeh Murakami Tse in New York contributed to this report.

What Dubya did next – a day in the new life of Ordinary George

It’s a long way from the goldfish bowl of the White House to a hardware store in Dallas. David Usborne reports on how the former US president came face to face with anonymity

How fast they fade. Poor George W Bush decided that an unannounced visit to a Dallas hardware shop at the weekend would be a fun way to emerge from a month of post-presidential purdah and make a splash with his new neighbours. But the greeter who met him inside, a pensioner named Henry Long, didn’t recognise him.

It could be that Mr Bush looks smaller in real life than he does on TV. That, at least, was the observation yesterday of Andrea Bond, the marketing director for Elliott’s Hardware, who was there the moment the 43rd President of the United States pushed open the door on Saturday and asked Mr Long where he might find a torch and batteries. It probably didn’t help that Mr Bush was dressed not in a suit but, says Ms Bond, “sweatpants and a windbreaker”.

No one will fault Mr Bush for having kept a low profile – mostly at his Crawford ranch with his wife, Laura; it is just polite since someone else is in charge. But sweatpant obscurity is not something he can afford to contemplate. There are memoirs to sell – no luck so far – and lectures to give and he already has the serious handicap of having left office with some of the lowest approval ratings of any president in modern history.

The resurfacing of “W” began with the moving vans arriving at the Bush’s new, one-storey home in the fancy Preston Hollow neighbourhood of north-west Dallas on Friday. The house, a 1959 four-bedroom brick “ranch”, is at the end of a cul-de-sac called Daria Place that will shortly be shut off with heavy-duty security gates that the Bushes have agreed to pay for. A police checkpoint is in place to discourage gawkers.

A few “Welcome Home, George and Laura” signs have sprouted on local lawns. The area is close to where Mr Bush lived before he became the governor of Texas in 1994 and is handy for the Preston Centre, where he will have a temporary office for planning and fundraising for his presidential library.

Retirement is tough, particularly if your job has been as all-consuming as running a super power.

“From personal experience, it will take a while to re-acclimate,” said James Oberwetter, a fellow Texan and family friend who served as ambassador to Saudi Arabia.

Don Evans, Mr Bush’s commerce secretary, says the Bushes are making a good start. “They’re adjusting quickly to this new life, to being out of the White House, and out of the proverbial bubble,” he said.

Moving weekend went well enough. There was a dinner on Saturday night at the home of the Preston Hollow billionaire Harold Simmons and his wife, Annette, with live entertainment from the pianist Adrian King, who is a favourite among Dallas’s well-heeled. Mr King is British, originally from Peterborough, but reportedly managed a fine rendition of “Hail to the Chief”.

And maybe showing up like an “ordinary George” at Elliott’s was a smart move. Ms Bond insists that her staff had had no warning of the visit. “I heard my boss saying something about the Secret Service outside and I thought it was a joke. Then George Bush was coming in the door with a big smile on his face. He walked in the door and said he was looking for a job and laughed about it.”

This wasn’t an entirely spontaneous joke, however. It was a few weeks back when the owners of Elliott’s used an open letter to the former president offering him a job – in fact Mr Long’s job, as a greeter – in the Dallas newspapers as a fun way to promote itself. Someone on Mr Bush’s staff must have spotted it.

“We’re confident that your experience working in your own family business, as well as your people skills developed throughout years of meeting with foreign dignitaries would make you an excellent candidate for the position,” read the offer, signed by Kyle Walters, the president and chief executive of Elliott’s Hardware.

“Furthermore, like you, many of our greeters are retired from the corporate world, so we’re sure you’ll have no trouble making new friends.”

As other ex-presidents, not least Bill Clinton, have demonstrated, taking a job as a shop greeter should not be necessary. In general, former leaders of the free world earn a very good deal more than the $400,000 (£280,000) salary they were paid annually while in office.

Making sure he does at least as well as his predecessors is now Mr Bush’s first priority.

“Previous presidents have found it often a gold mine,” says Stephen Hess, a senior fellow at the Brookings Institution, of the move out of office.

Nor can he ignore the challenge of launching his presidential library. To be built on the grounds of the Southern Methodist University in Dallas, it will, according to the latest plans, be twice the size of his father’s presidential library and will include a policy centre that has already been informally tagged the “Freedom Institute”. Raising the estimated $300m will be left largely to Mr Bush working the telephones.

“He’s got two or three really important priorities on his mind,” said Mr Evans. “One, he has to earn a living, so he’ll be on the speaking tour. He’s into writing his book. Thirdly is the importance of building the presidential centre, particularly the institute. He’s making many phone calls and will continue to I would say almost on a daily basis.”

While Mr Bush is rumoured to have already started writing a memoir of his eight years on Pennsylvania Avenue, there has so far been no word of his having actually landed a publishing contract.

He may or may not have been galled to learn at the weekend of the deal struck by Condoleezza Rice with Crown Books, promising at least $2.5m for a trio of three memoirs.

His prospects on the lecture circuit may also be a little dodgy. Certainly, they would be brighter if he had not left Washington with such dismal popularity ratings – 25 per cent was his paltry score as Barack Obama was elected his successor. So far, only one “W” appearance has been announced: he will travel to Calgary, Alberta, for a luncheon speech on 17 March. It is a long way in real miles but not political ones. Calgary, like Dallas, is an oil and cow town with plenty of conservatives willing to pay big bucks to hear Mr Bush.

But it isn’t clear even in Dallas that feelings towards the Bush clan will be universally warm. “I do think the Bushes will be well received, very comfortable within their circle,” said Cal Jillson, a political science professor at Southern Methodist University. “But they cannot but know that the broader interpretation of the Bush presidency is very negative.”

Though the thrill of having the just-retired president exploring the torch aisle is still with her, even Ms Bond acknowledges that the Bush fan base in Dallas has its holes.

“I think some parts of Dallas are very, very excited and some parts less so,” she observes.

“He is a controversial figure whichever way you look at it. Some people love him and some people don’t. He is who he is.”

Where are they now? The Bush posse

Dick Cheney

Mr Cheney may not need to return to Halliburton, the energy contractor where he served as CEO until Mr Bush tapped him as vice president. He is set to receive a state pension of $132,451 a year, based on various government jobs, including VP and one-time congressman. That means a pot of $3.24m if he makes it to 84 years old. We now know Cheney spent the last three days of the Bush presidency lobbying his boss to give a full pardon to Lewis “Scooter” Libby, his former chief of staff found guilty in the Valerie Plame-CIA trial.

Condoleezza Rice

Ms Rice signed a three-memoir publishing contract with Crown Books at the weekend that promises her an estimated $2.5m. Aside from reflecting on her service to George Bush, Ms Rice will also use one volume to trace her family history and her own rise from relative poverty in Mississippi to becoming the first black woman to reach such high office. She is also expected to return to the Hoover Institution at Stanford University where she will resume her pre-Bush career as a political science professor.

Hank Paulson

With no evidence at all that his stewardship of the economy and Wall Street in the last few months of the Bush administration did anything but worsen the crisis, you might think the former Goldman Sachs CEO would get as far away from Washington as possible. But Paulson is staying put, hanging his hat – for the time being at least – at the prestigious Johns Hopkins School of Advanced International Studies. What Mr Paulson will teach there exactly is not yet clear. He is officially described as a “distinguished visiting scholar”.