Banks can trade stock for more bailout money

WASHINGTON -- The nation's biggest banks are being granted immediate access to further support from the government's $700 billion financial rescue fund.

Treasury Department officials said Wednesday the support will be provided through the government's purchase of preferred shares of the bank stock that are convertible into common shares at a 10% discount to their price before Feb. 9.

The preferred shares will carry a 9% dividend and be convertible at the bank's option, but subject to regulatory approval.

The option to convert the preferred shares into common shares is a change in the rescue program designed to give financial markets greater confidence.

Common shares absorb losses before preferred shares do, which means that under a stock-conversion plan taxpayers would be on the hook if banks keep writing down billions of dollars' worth of rotten assets, such as dodgy mortgages, as many analysts expect they will.

However, common stock in banks is incredibly cheap, and taxpayers would reap gains if the banks come back to health and the stock price rises.

The Treasury Department also provided details of how a new stress test will function to ensure banks have enough capital to survive a downturn that would be even more severe than the current recession.

The stress tests will use two economic scenarios to gauge banks' health and are expected to be completed by the end of April.

The results will help regulators decide whether banks may need additional assistance so they can carry out the critical mission of boosting lending to customers, a key ingredient to the economic turnaround.