Bush announces 250-billion-dollar plan to buy bank shares

www.chinaview.cn 2008-10-14 20:43:21  

    WASHINGTON, Oct. 14 (Xinhua) --

U.S. President George W. Bush Tuesday announced measures to implement a plan of action agreed by the Group of Seven (G7) major advanced countries and to strengthen the banking industry.

    The government will use a portion of the 700-billion-U.S.-dollar financial rescue package to inject capital into banks by directly purchasing equity shares, Bush said in brief remarks in the Rose Garden of the White House.

    He said the government will initially buy stocks in nine major U.S. banks under its 250-billion-dollar purchase plan.

    "This new capital will help struggling banks fill the hole created by losses during the financial crisis, so they can resume lending and help spur job creation and economic growth," Bush said.

    Meanwhile, "effective immediately, the Federal Deposit Insurance Corporation (FDIC) will temporarily guarantee most new debt issued by insured banks," Bush announced.

    He said that this will address one of the central problems plaguing the financial system -- banks have been unable to borrow money.

    Created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s, the FDIC preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions.

    Also, the FDIC will immediately and temporarily expand government insurance to cover all non-interest bearing transaction accounts. These accounts are used primarily by small businesses to cover day-to-day operations.

    The fourth measure Bush announced is that the Federal Reserve will soon finalize work on a new program to serve as a buyer of last resort for commercial paper.

    "This is a key source of short-term financing for American businesses and financial institutions," Bush said.

    By unfreezing the market for commercial paper, he said, the U.S. central bank will help American businesses meet payroll, and purchase inventory, and invest to create jobs.

    "These efforts are designed to directly benefit the American people by stabilizing the financial system and helping the economy recover," the president said.

    The new measures the U.S. government is taking came after the G7 revealed a plan of action in Washington Friday to jointly fight the ongoing global financial crisis, pledging "to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth."

    "Yesterday, leaders in Europe moved forward with this plan," Bush said. "They announced significant steps to inject capital into their financial system by purchasing equity in major banks."

    And they announced a new effort to jumpstart lending by providing temporary government guarantees for bank loans, he said.

    "These are wise and timely actions, and they have the full support of the United States," Bush said.

    The G7 includes the United States, Japan, Britain, Germany, France Italy and Canada.

    U.S. Treasury Secretary Henry Paulson, at a news conference a short time later, said "today's actions are what we must do to restore confidence in our financial system."

    Fed Chairman Ben Bernanke welcomed all the new steps and said he believes they will help ease problems plaguing financial markets and threatening the economy.

Editor: An

Government moves again to unclog credit lines

By MARTIN CRUTSINGER AP Economics Writer

Oct 14, 2008, 3:03 PM EDT

WASHINGTON (AP) --

The government put itself four-square into the country's banking business Tuesday, resorting to what President Bush conceded was the unwelcome choice of buying into the system to loosen paralyzed channels of credit.

The president said the decision to buy shares in the nation's leading banks - a kind of federal intervention not seen since the Depression era - was "not intended to take over the free market but to preserve it."

But the administration was clearly conflicted by the action.

Said Treasury Secretary Henry Paulson: "We regret having to take these actions. Today's actions are not what we ever wanted to do - but today's actions are what we must do to restore confidence to our financial system."

At a news conference last month, Bush defended his administration's increasingly aggressive market interventions to deal with the biggest upheavals on Wall Street in seven decades.

"I'm sure there are some of my friends out there saying, I thought this guy was a market guy; what happened to him?," he said. "Well, my first instinct wasn't to lay out a huge government plan. My first instinct was to let the market work until I realized, upon being briefed by the experts, of how significant this problem became."

Said Paulson: "Government owning a stake in any private U.S. company is objectionable to most Americans - me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."

Nine major banks will participate initially, including all of the country's largest institutions. The first bank to take advantage of the new program was Bank of New York Mellon which announced Tuesday that it would sell $3 billion in preferred shares to the Treasury.

Some of the nation's largest banks had to be pressured by to participate by Paulson, who wanted healthy institutions that did not necessarily need capital from the government to go first as a way of removing any stigma that might be associated with banks getting bailouts.

It was the latest in a long series of moves taken by the administration and the Federal Reserve over the past several weeks to prop up a weakening financial industry. The economic picture in the United States had been darkening for months, but the slump took on new urgency - and had greater global repercussions - amid record-setting selloffs on Wall Street and enactment of a $700 billion bailout bill.

Under the new multifaceted stabilization program, the government will initially buy stocks in major banks. When financial markets stabilize and recover, the banks are expected to buy the stock back from the government, Bush said in brief remarks from the White House Rose Garden.

"These efforts are designed to directly benefit the American people by stabilizing the financial system and helping the economy recover," the president said.

The Federal Reserve, meanwhile, announced Oct. 27 as the startup date for a program it announced last week to buy vast amounts of short-term debt in an effort to get the commercial paper market functioning more normally.

Fed Chairman Ben Bernanke welcomed all the new steps and made clear that policymakers would continue to take actions as needed to battle the crisis.

"Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable set backs," he said. "But we will not stand down until we have achieved our goals of repairing and reforming our financial system and thereby restoring prosperity to our economy."

The move, in effect a partial nationalization of the banking system, does put the United States in the awkward position of owning shares in institutions it also regulates. The shares purchased by the government will be nonvoting ones.

"The government's role will be limited and temporary," Bush pledged. "These measures are not intended to take over the free market but to preserve it." He said these steps and other related actions echoed similar bold moves made overseas in an effort to prevent a global recession.

Bush said that by restoring confidence in the system, the hope is to "return our economy back to the road of growth and prosperity."

Executives of the country's biggest banks were summoned to a remarkable meeting at the Treasury Department on Monday to be briefed on the plan. Paulson basically told the bank CEOs that they had to accept the government stock purchases for the good of the U.S. economy.

The administration plans to spend $250 billion this year on the stock purchases and the president certified Tuesday that another $100 billion would be needed in connection with covering bad assets. That would leave $350 billion of the $700 billion program, presumably to be spent by the next president.

The action represents a remarkable turnaround for a rescue program that was already the largest bailout in U.S. history. As the plan sped through Congress, the administration said the money was needed to purchase bad mortgage-related assets that are weighing on the books of financial institutions, never mentioning direct stock purchases.

However, as the financial crisis gained new intensity last week, sending U.S. stocks down by a record amount, the administration decided to shift focus and adopt a bolder program modeled more along the lines of bank rescue efforts being put together in Britain and other European countries.

Bush spoke by phone Tuesday morning with the leaders of Britain, Germany and France, following meetings at the White House on Monday with Italian Premier Silvio Berlusconi. Bush also scheduled for Wednesday a special Cabinet meeting on the economy, White House press secretary Dana Perino said.

On Saturday, he is meeting at the Camp David presidential retreat with French President Nicolas Sarkozy and European Commission President Jose Manuel Barroso.

Tuesday morning's Wall Street advance took the Dow Jones industrials up more than 400 points at the opening and followed the Dow's historic 936-point jump Monday, when investors were buying in anticipation of the government's plan. In later trading Tuesday, stocks gave up most of the early gains.

After the purchase of preferred stock in nine large banks, the new program is expected to be expanded to many others and in fact thousands of banks and savings and loans will be eligible to participate.

The nine initial banks participating are Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase, Bank of America Corp, including the soon-to-acquired Merrill Lynch, Citgroup Inc., Wells Fargo & Co, Bank of New York Mellon and State Street Corp.

At a briefing, Treasury officials said that the first purchases of stock from the nine major banks will begin within days and will total $125 billion. The government expects to spend the entire $250 billion slated for the bank stock purchase program by the end of the year.

In addition to the stock purchases, the Federal Deposit Insurance Corp. will temporarily provide insurance for loans between banks, charging the banks a premium for doing so.

This FDIC program would take the form of providing insurance for new "senior preferred" debt that one bank would lend to another. This debt would be insured by the FDIC for three years, helping to unlock bank-to-bank lending, which has fallen dramatically because of fears about repayment in the face of billions of dollars of bank losses because of bad loans, primarily in mortgages.

The FDIC will also remove temporarily the current $250,000 limit on FDIC insurance on bank deposits for non-interest-bearing accounts. This primarily would benefit businesses who use non-interest-bearing accounts to run their companies. That money now would be insured, removing the need for companies to juggle funds among multiple bank accounts to stay under the $250,000 limit.

Congress, as part of the bailout bill, temporarily boosted the deposit insurance cap from $100,000 to $250,000, an action that will not be affected by the new program.

The $700 billion rescue program will continue to feature the purchase by the government of banks' bad assets, but the administration decided to place greater emphasis on the stock purchase program after doubts were raised about how long it might take to get the asset purchase program up and running.

Treasury officials said Tuesday that they still plan to buy troubled assets and that this program would start as soon as possible. To move that effort ahead, Treasury announced on Tuesday that it had selected Bank of New York Mellon to serve as the manager for the accounting portion of the bad asset program. It still must select the five to 10 big asset management firms that will run the purchase effort and manage the assets that are purchases.

House Financial Services Chairman Barney Frank, D-Mass., said he strongly supported Treasury's decision. He had urged the administration to include provisions for bank stock purchases as part of the rescue package.

Paulson said companies which sell stock to the government will be required to accept restrictions on executive compensation including a ban on golden parachutes for the period in which Treasury holds the banks' stock.

Worried about the slumping U.S. economy only three weeks from the elections, House Republicans and Democrats on Monday pushed for fresh action to prevent a serious downturn. Democrats scheduled hearings to consider a postelection stimulus package that could cost as much as $150 billion. Republicans called for more tax cuts and energy exploration.