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

Fed plans to use $250B of the $700B bill to recapitalize ailing banks.

October 13, 2008, 12:36 PM

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.

Meantime, Speaker of the House Nancy Pelosi, D-Calif., today called for a second economic stimulus package to be passed by Congress and said hearings would be held in the coming weeks to consider plans.

"Our country is at a very challenging moment and we need the best thinking in our country to address those concerns -- concerns of the American people, taxpayers, workers, homeowners," Pelosi said at a morning economic forum. "We need to address the stability of our markets, the stability of our economy. And I am so pleased that we have so many leaders and thinkers in the field with us today."

Pelosi and House Democrats held meetings with prominent economists and financial experts on Monday, including former SEC chairman Arthur Levitt, former Treasury Secretary Larry Summers, and 2001 winner of the Nobel Prize in economics, Joseph Stiglitz.

"We discussed this morning a recovery package that will enable America to lead, to participate in and take advantage of the opportunities that the 21st century will present to the world," Pelosi said, adding that she is working closely with the Obama campaign on the proposed recovery plan.

Democrats have discussed a $150 billion economic recovery deal with a focus on infrastructure projects for job creation. The package would come in addition to the recent $700 billion rescue package as well as the $152 billion economic stimulus package signed into law last February.

Asked if the new proposal would include rebate checks like the deal passed earlier this year, Pelosi said, "We have done that. There's some discussion as to how effective it was, how much bang for the buck. But certainly they would be in the mix of consideration... But first we want some of the issues that were not dealt with in the last package, because we want this to truly be a recovery package."

"The economy recovery plan won't turn our economy around instantly, obviously," said Maryland Democrat Steny Hoyer. "However, I am still confident that the financial recovery program will unfreeze our credit markets, protect families' homes, and help millions of workers keep their job. That is our objective. To get our economy back to health, Congress needs to consider further legislation to create jobs and help families in need."

ABC News' Charlie Herman, Alice Gomstyn, Jason Ryan and The Associated Press contributed to this report.

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