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WASHINGTON - Barack Obama is taking office at a time the escalating troubles facing major banks around the world couldn't be clearer.
On Monday, the British Government swooped in to boost its stake in troubled Royal Bank of Scotland to almost 70 per cent and offered to insure
banks against large-scale losses on risky assets in exchange for binding agreements to lend out more money.
It was the second major British bank bailout in three months. Shares of ailing RBS lost two-thirds of their value in Monday's trading. Shares of other European banks plunged after RBS said last year's losses could reach $41.3 billion.
Officials on both sides of the Atlantic have failed to contain the most severe credit crisis in decades, which has ravaged banks in places as diverse as Ireland, Iceland and Switzerland, and also the US and Britain.
Now top officials in London, Washington and Brussels are trying to find the best way to prod banks into lending out more money, struggling for a solution 18 months after the most severe credit crisis in decades sent investors reeling.
US officials are talking about establishing a new Government-backed bank to remove bad loans and other toxic assets from banks' balance sheets, Treasury Secretary Henry Paulson said last week. In theory, with those assets gone, banks would be freer to make more loans.
Still, figuring out a successful strategy for how to unclog the credit markets is a vexing challenge for Obama when he takes office today. Obama's top economic adviser, Larry Summers, said on CBS television on Sunday that under the new Administration, "The focus isn't going to be on the needs of banks. It's going to be on the needs of the economy for credit."
Obama will have a "strong message for the bankers," adviser David Axelrod said on ABC television. "We want to see credit flowing again. We don't want them to sit on any money that they get from taxpayers."
While the British Government moves closer to a full takeover of that country's banking system, Americans are more leery of such intervention, and that's likely to continue, even with Democrats in charge of the White House and Congress, analysts say.
The US Government has so far provided $192.3 billion to 257 large and small financial institutions in 42 states and Puerto Rico in a financial bailout programme that has proven extremely unpopular with the public. Now the Government is facing calls to use its power to fire executives at banks that receive Government aid.
"What you really need is ... a change of management in these banks," Johnson said. "The banks have been run by incompetent bunglers."
One key question, though, is how much the new bank would pay for distressed assets. Buying assets at too high a price would reward them for taking too much risk. Buying at too low a price would mean banks would have less money to lend out in the future, said Stephen Lewis, chief economist at Monument Securities in London.