By Martin Crutsinger, AP Economics Writer
Bush to announce bank rescue plan with $250 billion in stock purchases to
bolster reserves
WASHINGTON (AP) -- The Bush administration will spend $250 billion this year to
purchase stock in banks and take a number of other bold steps in an effort to
combat a global credit crisis that is threatening to push the country into a
deep recession, industry and government officials say.
President Bush was scheduled to announce the new initiatives early Tuesday
after executives of the country's biggest banks were summoned to a remarkable
meeting at the Treasury Department on Monday. Treasury Secretary Henry 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 of the $700 billion government
rescue program passed by Congress on Oct. 3 to make stock purchases this year.
The first purchases will be in nine large banks, officials said. The industry
and government officials spoke on condition of anonymity because the details
were yet to be formally released.
The decision represents a remarkable turnaround for the $700 billion rescue
program, 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.
Major stock markets around the world surged higher Monday as traders began to
hear of new actions being taken in Europe, where governments put $2.3 trillion
on the line Monday in guarantees and other emergency measures to save banks
there.
On Wall Street, the Dow Jones industrial average soared by a one-day record of
936 points. But all the stock gains came after staggering losses in the
previous week and economists said more rough days can be expected until there
are clearer signs that the credit crisis is lessening.
While the administration refused to provide details in advance of Bush's
appearance, industry and government officials who were briefed on the proposals
said the stock purchase was aimed at bolstering depleted capital reserves as a
way of getting the institutions to resume more normal lending patterns.
After the purchase of preferred stock in nine large banks, the program is
expected to be expanded to many others. Among the initial banks participating
will be all of the country's largest institutions, including Citigroup Inc.,
Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp. and Morgan
Stanley, said one official, with each institution expected to receive billions
of dollars in return for the sale to the government of preferred shares.
The advantage to the taxpayer is that if the rescue plan works, then the shares
can be sold for more than the government initially paid, providing a profit on
the transaction.
Bush will certify Tuesday that another $100 billion is needed from the $700
billion rescue program. That would leave the final $350 billion to be spent,
probably by the next president.
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, the officials who were briefed on the program's details
said.
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 officials said the FDIC would remove for a period 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.
Democrats in Congress, while supportive of Paulson's desire to expand the
program, complained Monday that not enough strings were being attached, such as
restricting excessive compensation for Wall Street executives who raked in
millions of dollars in bonuses by pursuing risky investment strategies that now
have helped push the U.S. financial system to the brink.
The government should purchase only stock in financial firms that agree to cut
dividends paid to shareholders, adhere to strict limits on executive
compensation and curb their use of exotic investment strategies, Sen. Charles
Schumer, D-N.Y., chairman of the Joint Economic Committee, argued.
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.
In a campaign speech in Ohio, Democratic presidential nominee Barack Obama
proposed a 90-day moratorium on home foreclosures at some banks and a two-year
tax break for businesses that create new jobs. His Republican opponent, John
McCain, promised a change in direction from the Bush administration's economic
policies.
The administration on Monday announced a series of steps to get the rescue
program under way, including selecting a team of interim managers, picking an
outside firm to help run the program and choosing a prominent New York law firm
to draw up guidelines for how the stock purchase program will work.
Associated Press writers Devlin Barrett and Julie Hirschfeld Davis contributed
to this report
http://biz.yahoo.com/ap/081014/financial_meltdown.html
The law of gravity says no fair jumping up without coming back down
--~--~---------~--~----~------------~-------~--~----~
You received this message because you are subscribed to the Google Groups
"Kences1" group.
To post to this group, send email to [email protected]
To unsubscribe from this group, send email to [EMAIL PROTECTED]
For more options, visit this group at
http://groups.google.com/group/kences1?hl=en
-~----------~----~----~----~------~----~------~--~---
