The Bush administration plans to spend an initial $250 billion of the $700 billion bailout buying stock in private banks, greatly expanding protections for the U.S. financial system out of deep concern for the faltering economy, industry and government officials said Monday night. President Bush planned to announce the details Tuesday morning.
Agreement on the plan came after a remarkable Treasury Department meeting between top government economic officials and executives of the nation's largest banks to revamp the most costly financial rescue in the nation's history.
The plan also would provide a way for the government to insure loans that banks make to each other, a critical part of the credit system that has become frozen and put many businesses in peril.
Earlier Monday, stocks soared around the world in response to dramatic government economic relief efforts in the U.S. and overseas — and the possibility of the even bolder American action.
Monday night, the Treasury Department said the administration had decided on "comprehensive actions" to bolster public confidence in the nation's financial system. Bush was to be briefed early Tuesday by economic advisers and then announce the plan, which Treasury said was designed to "restore functioning of our credit markets."
While the administration refused to provide details in advance, industry and government officials with knowledge of the plan said it would include billions of dollars in spending by the government to purchase stock in banks as a way of providing them desperately needed money so they could resume more normal lending. The industry and government officials spoke on condition of anonymity because the details were yet to be formally released.
The administration will use $250 billion of the bailout program recently passed by Congress to buy into U.S. banks, the officials said. The government initially will purchase stock of nine large banks, but the program is expected to be expanded to many others. Among the initial banks participating will be all of the country's largest institutions, including Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co, Bank of America Corp. and Morgan Stanley, said one official, who added that administration briefers did not provide any amounts that would be received by individual banks.
The administration expects to spend the $250 billion buying bank stock before the end of this year, this official said. Bush will certify on Tuesday that another $100 billion is needed from the $700 billion rescue program. That would leave the final $350 billion to be spent.
In addition to the stock purchases, the Federal Deposit Insurance Corp. will temporarily provide insurance for loans between banks, charging the banks a premium for doing so.
This FDIC program would take the form of providing insurance for new "senior preferred" debt that one bank would lend to another. This debt would be insured by the FDIC for three years, helping to unlock bank-to-bank lending, which has fallen dramatically because of fears about repayment in the face of billions of dollars of bank losses because of bad loans, primarily in mortgages.
The officials said that the FDIC would remove for a period the current $250,000 limit on FDIC insurance on bank deposits for non-interest bearing accounts. This would primarily benefit businesses who use non-interest bearing accounts to run their businesses. That money would now be insured, removing the need for these businesses to juggle funds among multiple bank accounts to stay under the $250,000 limit.
Congress as part of the bailout bill temporarily boosted the deposit insurance cap from $100,000 to $250,000.
The administration's proposals were explained during a meeting at the Treasury Department that had been called by Treasury Secretary Henry Paulson and included the top executives of the largest banks in the country. Federal Reserve Chairman Ben Bernanke also participated in the discussions.
The new approach by the U.S. government is modeled after parts of the strong initiatives in Europe, where governments put $2.3 trillion on the line Monday in guarantees and other emergency measures to save banks there.
The $700 billion rescue program that Congress passed on Oct. 3 will continue to feature the purchase by the government of banks' bad assets but will now devote a significant part of the effort to direct government purchases of stock in banks, an idea that Paulson brought up only last week.
Major stock markets around the world surged higher — after plunging ever lower last week — as traders began to hear of Europe's actions and the possibility of further steps in the United States.
On Wall Street, a record 936-point increase in the Dow Jones industrials far surpassed the previous one-day mark of 499 points, set in the waning days of the dot-com boom in 2000. But the surge came after the staggering losses of the worst week ever, and economists said more rough days can be expected. European markets rallied following Asia's lead in response to the widespread government initiatives.
"These are tough times for our economies, yet we can be confident that we can work our way through these challenges and America will continue to work closely with the other nations to coordinate our response to this global financial crisis," Bush said following a meeting with Italian Premier Silvio Berlusconi at the White House.
Over the weekend, Paulson had called the heads of the five biggest U.S. banks to come to Washington for face-to-face talks about the rescue plan, according to people briefed on the matter.
Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, JPMorgan Chase & Co. CEO Jamie Dimon and Bank of America Corp. CEO Kenneth Lewis were all asked to attend.
Democrats in Congress, while supportive of Paulson's desire to expand the program, complained earlier Monday that not enough strings were being attached, such as restricting excessive compensation for Wall Street executives who raked in millions of dollars in bonuses by pursuing risky investment strategies that have now helped push the U.S. financial system to the brink.
The government should purchase only stock in financial firms that agree to cut dividends paid to shareholders, adhere to strict limits on executive compensation and curb their use of exotic investment strategies, said Sen. Charles Schumer, D-N.Y., chairman of the Joint Economic Committee.
Separately, House Republicans and Democrats pushed for fresh action to stimulate the faltering economy.
Democrats scheduled hearings to consider a postelection stimulus package that could cost as much as $150 billion. Republicans called for more tax cuts and energy exploration.
In a campaign speech in Ohio, Democrat Barack Obama proposed a 90-day moratorium on home foreclosures at some banks and a two-year tax break for businesses that create new jobs. Republican John McCain promised a change in direction from the Bush administration's economic policies.
As for the Europeans, governments there said they were putting $2.3 trillion on the line, based on pledges from Britain, Germany, France, Spain, Austria and Portugal in recent days. To assist the European banks, the Federal Reserve here announced Monday that it was taking actions to assure enough U.S. dollars were available to meet demand.
"The government cannot just leave people on their own to be buffeted about," said British Prime Minister Gordon Brown.
The Bush administration also announced the selection of a team of interim managers, picked an outside firm to help run the program and selected a prominent New York law firm to draw up guidelines for how the stock purchase program will work. Officials also announced that Bernanke had agreed to serve as chairman of the oversight board Congress mandated.
Assistant Treasury Secretary Neel Kashkari, who was tapped by Paulson to be interim head of the program a week ago, said that the firm of Simpson Thatcher & Bartlett LLP had been chosen to work on guidelines on stock purchases while the investment consultancy of Ennis Knupp & Associates had been picked to help supervise the selection of the program's private asset managers.
"We are moving quickly — but methodically — and I am confident we are building the foundation for a strong, decisive and effective program," Kashkari said in a speech to the Institute of International Bankers.