Bank-Equity Program Gets Accounting Fix

[Mrs. Sharon B. Hodge]

WASHINGTON -- The Bush administration is expected to allow banks that participate in the government's $250 billion capital-injection program to avoid triggering an accounting rule that could have hurt the banks' finances.

The program, announced last week, is intended to encourage banks to lend again by having the government take equity stakes in the institutions so they can rebuild their capital levels. But in its rush to get the program under way, the administration overlooked a key detail involving the potential issuance of stock, people familiar with the matter said.

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Under the initial plans, participating banks will sell the government a certain amount of preferred stock. But they are also required to issue warrants, which give the government the right to purchase a bank's common stock at a certain price. However, the $700 billion rescue legislation passed by Congress requires that the warrants be treated as a liability on their balance sheets. That could force the banks to record a loss and thus impair their capital levels -- the very opposite of what the government is aiming to accomplish.

The Securities and Exchange Commission and the Financial Accounting Standards Board are expected to issue guidance telling the banks participating in the program that they can consider the warrants "permanent equity" under generally accepted accounting principles, people familiar with the matter said.

Under such guidance, the problem would be resolved because the warrants wouldn't be considered a liability and wouldn't trigger "mark to market" accounting that forces them to price them at their currently diminished value, the people said.

The logistical snafu had complicated the Treasury Department's plan to inject $125 billion into nine of the U.S.'s largest financial institutions. Treasury had anticipated formally buying equity stakes in the nine banks early this week. But the accounting issue raised concern at many of the banks, prompting a round of calls during the weekend to resolve the issue.

Financial-services representatives said the resolution will enable the effort, known as the Troubled Asset Relief Program, to go forward. "This removes a barrier to fully realizing TARP's goal of restoring liquidity," said Scott Talbot, senior vice president of government affairs for the Financial Services Roundtable, a trade group.

The problem stems from the fact that the banks will eventually have to officially issue the stock to cover the warrants, since the government may opt to convert its warrants into stock. If the banks register shares immediately, such a move could dilute their earnings per share because it would increase their number of shares outstanding. Book value, which essentially reflects a bank's net worth, is an important measure of a bank's health.

Write to Deborah Solomon at [e-mail]