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The Bush administration unveiled a plan Tuesday to stabilize the teetering U.S. banking system with as much as $250 billion of the financial sector rescue fund. Three economic experts discuss the impact of the plan.
The plan to buy billions in banking stocks comes after a similar coordinated move was announced by European governments yesterday.
Less than a month ago in a congressional hearing, Treasury Secretary Henry Paulson seemed to dismiss the notion of a government equity purchase program.
HENRY PAULSON, U.S. Treasury Secretary:
There are some that said we should just go and stick capital in the banks, with preferred stocks, stick capital in the banks. And that's what you do when you have failures.
The right way to do this is not going around and using guarantees or injecting capital, and there's been various proposals to do that, but to use market mechanisms.
But that was then. By this morning, circumstances had changed, and Paulson and other top economic officials detailed a bank stock purchase plan.
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.
When financing isn't available, consumers and businesses shrink their spending, which leads to businesses cutting jobs and even closing up shop.
Though the plan is voluntary, Paulson reportedly made it clear in meetings yesterday with the heads of large banking institutions that their participation was virtually required.
Today's government actions include the $250 billion plan to purchase stock in U.S. banks. The money comes out of the $700 billion rescue package passed 11 days ago by Congress.
$125 billion goes to nine banks. Citigroup, Bank of America, Wells Fargo, and JPMorgan Chase will each receive $25 billion in return for preferred stock. Five other institutions will split $25 billion. Another $100 billion will be available for smaller regional banks.
The government would also guarantee new debt issued by banks for the next three years. In exchange, participating institutions promise to limit executive compensation and ban so-called golden parachutes for executives as long as the government holds the stock.
The FDIC will also now provide unlimited insurance to all non-interest-bearing bank accounts in the U.S. until the end of next year, a move intended to help small business.
The chair of the Federal Reserve, Ben Bernanke, an expert on past financial calamities, said the extraordinary moves were suited to the time.
BEN BERNANKE, Federal Reserve Chairman:
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 actions today are aimed with restoring confidence in our institutions and markets and repairing their capacity to meet the credit needs of American households and businesses.
The voluntary equity purchase program, described by the secretary, will strengthen financial institutions' capacity and willingness to lend.
Sheila Bair is chair of the FDIC.
SHEILA BAIR, Chairman, Federal Deposit Insurance Corporation:
Our efforts also parallel those of the international community. Their guarantees for bank debt and increases in deposit insurance would put U.S. banks on an uneven playing field unless we acted, as we are today.
After the plan was announced this morning, markets surged, before falling into negative territory by day's end.
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