WASHINGTON (AFP) — US authorities Tuesday pushed forward a massive financial rescue with a plan to inject up to 250 billion dollars in capital to struggling banks and offer new guarantees to help restore credit flows.
Nine large banks agreed to plan to give the government equity stakes in exchange for new capital, Treasury Secretary Paulson said in announcing the latest steps.
Other banks will have an option to accept the program, in which the government gets "senior preferred shares" which would be "non-voting, other than class voting rights on matters that could adversely affect the shares," according to a Treasury statement.
Banks in the program will agree to limits on executive pay and other benefits.
The government also will temporarily guarantee bank debt and interbank lending and offer unlimited deposit insurance for many accounts as part of a stepped-up global effort to stem a credit crunch resulting from a collapse of the US housing market.
Officials also said that the Federal Reserve would soon act as the "buyer of last resort" for commercial paper, which is short-term corporate debt that is critical for financial markets and companies needing cash for operating expenses.
"These actions will bolster public confidence in our system to restore and stabilize liquidity necessary to support economic growth," said a joint statement by Paulson, Federal Reserve chairman Ben Bernanke and the head of the government's Federal Deposit Insurance Corp, Sheila Bair.
The efforts are part of a 700-billion-dollar emergency rescue package approved last month by Congress in the face of a widening global crisis.
The moves come following a weekend pledge by the Group of Seven economic powers to use all available tools to keep financial markets functioning and save key financial institutions. It also follows efforts made in Britain to inject capital into struggling banks and get credit flowing.
"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," Paulson said.
"Government owning a stake in any private US company is objectionable to most Americans -- me included," he added.
"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."
US President George W. Bush said the effort is needed to boost confidence and avert a severe downturn.
"These measures are not intended to take over the free market, but to preserve it," the US president said in brief remarks in the White House Rose Garden.
Bush said the Federal Reserve "will soon finalize work on a new program to serve as a buyer of last resort for commercial paper," expanding an earlier program announced to buy up some of the outstanding corporate debt that banks have been shunning.
Bernanke said in a separate statement these efforts are aimed at fixing the global crisis of confidence.
"At the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets," he said.
"I also find it heartening that we are seeing not just a national, but a global response to the crisis, commensurate with its global nature."
The FDIC meanwhile said it was launching a "Temporary Liquidity Guarantee Program" that guarantees newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and provides unlimited coverage of non-interest bearing deposits.
"The overwhelming majority of banks are strong, safe, and sound. A lack of confidence is driving the current turmoil, and it is this lack of confidence that these guarantees are designed to address," Bair said.
The guarantee will allow banks and their holding companies to roll maturing debt into new issues fully backed by the government for up to three years in the program, which will be available through next June. The program will be funded by a new assessment on bank deposits.
Analysts gave a positive response to the new effort.
"It took a while, but US policymakers have finally deployed measures aimed directly at the heart of the problem," said Aneta Markowska at Societe Generale.
"The problem is fear of insolvency and the measures announced today -- capital injections along with guarantees of bank debt -- should reduce insolvency risk, restore confidence and significantly improve bank funding flows."
Ed Yardeni at Yardeni Research said the effort is part of an extraordinary global response.
"If it works, as I think it will, then we will have stepped back from the brink of a financial meltdown and an economic disaster," he said.
"The governments of the world all seemed to agree this weekend that they must reflate quickly and aggressively to avert a deflationary depression."
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