By Karey Wutkowski and Patrick Rucker
WASHINGTON (Reuters) - The George W. Bush administration may give an unlimited guarantee to bank deposits or buy a share of major banks in an effort to stabilize the battered financial sector and reeling markets.
Senior Bush policy-makers will hold a conference call with financial services leaders at 2:30 p.m. on Friday to discuss the deepening crisis.
In recent weeks, global credit markets have frozen on fears that more major financial companies will collapse.
The U.S. Treasury Department and bank regulators have been working feverishly to craft policies that will restore confidence in the market and unclench credit markets, said several sources familiar with the discussions.
The idea of lifting the lid on insured deposits and the government becoming a shareholder in major banks has become the focus of policy-makers in recent days, said the government and industry sources.
Another option being discussed is to just lift the insurance limit on the transaction accounts businesses routinely use to meet payrolls and pay vendors.
In an address on Friday morning, Bush attempted to soothe markets.
"The federal government has a comprehensive strategy and the tools necessary to address the challenges in our economy," Bush said, as he specifically mentioned the government's power to buy a stake in financial companies.
A Treasury spokesperson said on Friday that the possibility of equity-related purchases was one of several powers granted to the Treasury under the financial rescue legislation and added that any discussions on the topic would include Federal Reserve and White House representatives.
No announcements are said to be expected for at least several days on this.
While many industry sources agreed that more government aid could be helpful, they warned that an abrupt injection of government cash could startle investors who would likely see their stakes diluted. Also, it could send the signal that the banks are in worse condition that previously thought.
The end result could be a loss of confidence that nullifies the benefits of a capital injection.
Wayne Abernathy, executive vice president for financial institutions at the American Bankers Association, said what banks really need is a clearer idea of what U.S. government intervention plans may be.
"There's a fair amount of concern about the way things are put out there in a broad way without details, and with the impact the investor reaction has on the banks," Abernathy said.
STEPS ALREADY TAKEN
The bailout package enacted early this month, authorized the Treasury Department to purchase up to $700 billion in soured investments from financial services companies to help them scrub their balance sheets and return to normal lending.
In the same move, Washington raised the limit on insured deposits from $100,000 to $250,000 in a bid to calm depositors who might have worried that their money could be lost in a bank failure.
Those initiatives, however, have not been enough to restore confidence to the markets or lenders, and policy-makers have returned to the drawing board.
The Federal Deposit Insurance Corp is mulling lifting the limit on insured deposits but that action, too, could be fraught with damaging consequences.
FDIC Chairman Sheila Bair has voiced some concerns about raising deposit insurance limits. She said there are "issues about moral hazard" because it removes a level of market discipline and could support more risky lending practices.
Abernathy said banks are wondering about the upside of a lift on insurance deposit limits, when many are already seeing their deposits increase as investors flee the stock market and liquidate their stakes.
"If they blow the caps off the top, who's going to pay for that? And frankly stronger banks are wondering if they're going to have to pay for their weaker brethren," he said.
Banks are already facing higher premiums in an attempt to replenish the FDIC's $45 billion deposit insurance fund, which has been depleted by an increase in bank failures in recent months. So far, 13 banks have failed this year, including Washington Mutual, the largest bank failure in U.S. history.
The FDIC on Tuesday proposed more than doubling the average fee rate U.S. banks will have to pay into the insurance fund in an attempt to replenish the coffers.
(Additional reporting by Glenn Somerville; Editing by Tom Hals)
