WASHINGTON -- President Bush on Tuesday announced details of a dramatic change in the $700 billion plan to rescue ailing financial firms, with the government quickly using up to $250 billion to buy stock in banks.
The government will temporarily guarantee new loans between banks and offer to insure unlimited deposits in accounts that don't pay interest, such as checking accounts. The new guarantee goes beyond the $250,000 federal insurance that generally applies to bank deposits.
Executives of the country's biggest banks were summoned to a remarkable meeting at the Treasury Department to hear the plan 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.
Government stock purchases would quickly give banks cash to shore up their balance sheets and encourage them to lend to each other, and to businesses and consumers. Among those said to be in line for government investment: Citigroup c, Wells Fargo wfc, JPMorgan Chase jpm, Bank of America bac, Morgan Stanley ms, State Street stt, Merrill Lynch mer, Bank of New York Mellon bk and Goldman Sachs (gs).
The Investment Company Institute, the trade group for mutual funds, said unlimited insurance on bank checking accounts would prompt investors to shift money from money market mutual funds to banks. But Scott Talbott, a senior vice president at The Financial Services Roundtable, which represents the nation's largest banks, said his group "strongly supports the use of these tools."
Under the $700 billion rescue package passed by Congress and signed by President Bush on Oct. 3, the Treasury may still buy bad assets, mostly mortgage-related, as was earlier the focus. But the thrust has shifted to government purchases of bank stock, as allowed by the new law.
In The Wall Street Journal Tuesday, Federal Reserve chairman Ben Bernanke wrote: "Our strategy will continue to evolve and be refined, and we will adapt to new developments and the inevitable setbacks. 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."
Rep. Spencer Bachus, R-Ala., an advocate of direct capital injections, praised the move. "It's simpler, it's quicker and it's safer for the taxpayer," he said. "If anything will work, this will."
Europe, with its series of actions Monday to strengthen banks there, set the pattern for the U.S. plan. If the U.S. did not act in a similar fashion, investors might have moved money abroad to seek safety. "Washington has no choice but to go largely the same way that Europe and other countries already have — substantial nationalization of the banking sector," said Donald Straszheim of Roth Capital Partners.
The U.S. government is also quickly hammering out how it will conduct auctions to buy bad mortgage-backed assets and is designing programs to buy mortgages from regional banks, establish an insurance program for troubled assets and help people hold on to their homes.
"A program as large and complex as this would normally take months — or even years — to establish. We don't have months or years," Neel Kashkari, the Treasury official tapped last week to head the program, said in a Monday morning speech.