Oct. 14, 2008 -- President Bush announced today the United States will embark on a bold plan to buy stakes in ailing banks in what is being called the largest intervention into the U.S. banking sector since the Great Depression.
Treasury Secretary Henry Paulson said the plan will take $250 billion of the $700 billion in the congressional bailout bill.
Bush, speaking from the White House Rose Garden, called the action temporary and necessary to inject capital into banks that have all but stopped lending money. This action is "not intended to take over the free market, but to preserve it," Bush said.
"This new capital will help healthy banks continue making loans to businesses and consumers," Bush added. "And this new capital will help struggling banks. … So they can resume lending and help spur job creation and economic growth."
"Today we are taking decisive actions to protect the U.S. economy," Paulson said. "We regret having to take these actions. Today's actions are not what we ever wanted to do, but today's actions are what we must do to restore confidence to our financial system."
After the Bush announcement, the Dow Jones industrial jumped 300 points at the opening bell.
The nine participating financial institutions include banking giants JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. ABC News confirmed Tuesday that the Treasury Department will buy $25 billion in preferred stock in Bank of America, including Merrill Lynch. It will also buy $25 billion in JP Morgan, $10 billion in Goldman Sachs, $3 billion in Bank of New York Mellon and $2 billion in State Street.
Wells Fargo also issued a statement Tuesday, saying, "In general, we believe the Treasury's plan is a positive step toward providing much needed capital for financial institutions that are in the best position to deploy it effectively to stimulate the U.S. economy and strengthen confidence in the U.S. banking system."
Citigroup also released a statement, saying it backs "the series of bold steps" announced today.
Though the plan is said to be voluntary, several analysts said that the banks did not have much choice but to accept the investment.
The plan was finalized Monday after top financial CEOs were summoned to a meeting with Paulson to discuss the details, which call for the financial intuitions to sell preferred stock to the U.S. government, giving the Federal Reserve System a stake in the companies.
By expanding the scope of the rescue plan to include partial ownership of U.S. banks, leaders hope to stabilize the markets.
Bush also announced additional moves he hopes will make it easier for people to borrow money that include:
The Federal Deposit Insurance Corp. will "temporarily guarantee" most new debt issued by insured banks.
The FDIC also will expand government insurance to cover all noninterest bearing accounts, which will help small businesses.
The Federal Reserve will soon finalize work on a new program to serve as "a buyer of last resort" for commercial paper, the instrument many businesses use to fund day-to-day operations.
Rebound on Wall Street, European Action
Formally announced this morning, the move comes a day after 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 response, world markets surged today. Japan's Nikkei set a single-day record by gaining more than 14 percent. Early trading in Europe showed gains of at least 4 percent in Britain, Germany and France.
U.S. plans follow similar agreements made overseas during the weekend, which allow European countries to pump money into struggling banksto encourage them to start lending again.
Most observers say the bold actions are needed.
"The markets are watching. People are watching," said Raghu Rajan, a professor of finance at the University of Chicago, Monday. "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."
Meeting Monday morning at the White House with Italian Prime Minister Silvio Berlusconi, Bush said he was encouraged both by the agreements made abroad and plans under way in the United States.
"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."
"We are moving quickly -- but methodically -- but I am confident we are building a foundation for a strong, decisive and effective program," Assistant Treasury Secretary Neel Kashkari, interim bailout package chief, said Monday.
On Monday, the Treasury Department also announced that it had 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.
Meantime, Speaker of the House Nancy Pelosi, D-Calif., called for a second economic stimulus package Monday 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 Monday, including former SEC chairman Arthur Levitt, former Treasury Secretary Larry Summers and Joseph Stiglitz, the 2001 winner of the Nobel Prize in economics.
"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 February.
Asked whether the new proposal would include rebate checks such as 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 jobs. 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."
The Associated Press, ABC News' Charlie Herman, Alice Gomstyn and Zunaira Zaki contributed to this report.