Fed Plans $250B to Bail Out Banks, Sources Say

Oct. 13, 2008 — -- The Federal Reserve plans to use $250 billion of the $700 billion approved by Congress to recapitalize ailing banks, and while the number of willing participants is unclear, the plan requires nine major banks to take part, officials told ABC News today.

The move, expected to be formally announced Tuesday, comes as Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson spent the day in Washington meeting with the heads of major U.S. banks to pound out the details of a more far-reaching American rescue plan, including using some of the $700 billion approved by Congress to buy direct stakes in troubled U.S. banks.

Tuesday morning, President Bush is set to meet with members of the President's Working Group on Financial Markets and address the nation on the state of the economy at 8:05 a.m.

Following the president's statement, Paulson and Bernanke, along with some members of the President's Working Group, will make an announcement at 8:30 a.m., before the markets open, according the U.S. Treasury Department, on their plan to "strengthen public confidence in our financial institutions and restore functioning of our credit markets."

It is now clear that the original bailout plan will not be enough to stabilize the market and that leaders are looking to expand the scope of the rescue plan to include partial ownership.

"The markets are watching. People are watching," said Raghu Rajan, a professor of finance at the University of Chicago. "They are nervous and they are willing to have some confidence in the government, but if the governments don't pull it out this time, then the next time the breakdown will be much worse."

This weekend, European leaders announced an agreement on a plan to pump money into struggling banks to encourage them to start lending again.

President Bush, meeting at the White House with Italian Prime Minister Silvio Berlusconi, said he was encouraged by the developments.

"I welcome the bold and specific follow-up actions by European nations to pursue the G-7 [Group of Seven] action plan," Bush said. "And the United States is also acting, and we will continue to implement measures consistent with the G-7 action plan to help banks gain access to capital [and] restore confidence in our financial system."

Berlusconi expressed full confidence that the coordinated efforts of the United States and Europe will prevent catastrophe.

"I'm a hundred percent sure and confident that we have the means and way to prevent this from happening," Berlusconi said. "And that to the wealth of our citizens, the wealth that our citizens enjoy will not be affected by this."

Assistant Treasury Secretary Neel Kashkari, who is the interim bailout package chief, told reporters leaders are working hard to determine which assets should be purchased from struggling banks.

"We are moving quickly -- but methodically -- but I am confident we are building a foundation for a strong, decisive and effective program," Kashkari said.

The Treasury Department also announced that it has hired the Chicago-based EnnisKnupp and Associates to be its investment adviser. The firm will help the government identify assets that could be purchased from struggling banks under the Emergency Stabilization Act passed by Congress.

Global markets reacted positively overnight to the collaborative efforts, ending sharply up. In New York, the Dow Jones industrial average rose 936 points, the largest one-day point gain ever and almost twice the previous record rise of 499 points. Monday's jump erased half of the record losses that occurred through all of last week.

In Europe today, the Bank of England, the European Central Bank and the Swiss National Bank jointly announced they would immediately offer unlimited short-term credit for any bank that needs it.

"The government cannot just leave people on their own to be buffeted about," British Prime Minster Gordon Brown said.