Bush announces plan to buy $250 bln worth of bank equities

WASHINGTON, Oct. 14 (Yonhap) -- U.S. President George W. Bush said Tuesday that his administration will inject US$250 billion into struggling banks to help them lend money to each other, as well as to businesses and consumers.

The money is part of a $700 billion bailout plan approved by Congress weeks ago
to buttress the U.S. financial system, which is suffering its worst crisis since
the Great Depression. The current credit crunch was caused by falling housing
prices that triggered the subprime mortgage crisis.
"First, the federal government will use a portion of the $700 billion financial
rescue plan to inject capital into banks by purchasing equity shares," Bush said
in a speech. "This new capital will help healthy banks continue making loans to
businesses and consumers, and this new capital will help struggling banks fill
the hole created by losses during the financial crisis so they can resume lending
and help spur job creation and economic growth."
The measure comes as financial institutions have been staying away from lending
money each other to avoid a possible default amid fears over their financial
soundness after the collapse and mergers of major U.S. financial institutions in
recent weeks.
It also follows announcements on Monday by major European governments that they
will pour public funds into the struggling financial system and guarantee
deposits and bank loans, which greatly boosted the global stock markets.
On Monday, the Dow Jones industrial average rose 11.1 percent, the largest leap
in decades, ending 936.42 points higher after a tumultuous week that witnessed
the Dow's biggest week-on-week decline in history.
The U.S. markets appeared to respond favorably to Bush's announcement made
earlier in the day as the Dow Jones industrial average rose 3.39 percent, or 363
points, at the opening, although the gain was reduced to about 50 points at
around midday.
"These are wise and timely actions, and they have the full support of the United
States," Bush said in the speech delivered at the White House Rose Garden.
Apparently bearing in mind the criticism that the U.S. government is undermining
free market principles, Bush said, "This is an essential short-term measure to
ensure the viability of America's banking system, and the program is carefully
designed to encourage banks to buy these shares back from the government when the
markets stabilize and they can raise capital from private investors."
The president said the government's role will be "limited and temporary," adding,
"These measures are not intended to take over the free market, but to preserve
it."
Bush dismissed criticism that the measures appear "distant" from people's
retirement accounts, college savings and other investments, saying, "These
efforts are designed to directly benefit the American people by stabilizing our
overall financial system and helping our economy recover."
In a separate news conference, Treasury Secretary Henry Paulson echoed Bush's
speech, saying, "The government owning a stake in any private U.S. company is
objectionable to most Americans, me included, yet the alternative of leaving
businesses and consumers without access to financing is totally unacceptable."
"When financing isn't available, consumers and business shrink their spending,
which leads to businesses cutting jobs and even closing up shop," Paulson said.
"To avoid that outcome, we must restore confidence in our financial system. The
first step in that effort is a plan to make capital available on attractive terms
to a broad array of banks and thrifts so they can provide credit to our economy."
The secretary said the $250 billion will be available to U.S. financial
institutions in the form of preferred stocks.
The nine largest banks will receive $125 billion, and the rest will go to other
minor financial institutions, he said. The nine are the Bank of America, Merrill
Lynch, the Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan Chase,
Morgan Stanley, State Street and Wells Fargo.
Those banks that receive the public funds "will accept restrictions on executive
compensation, including a call-back provision and a ban on golden parachutes
during the period the Treasury holds equity issued through this program," he
said. "In addition, taxpayers will not only own shares that should be paid back
with a reasonable return, but will also receive warrants for common shares in
participating institutions."
In approving the unprecedented bailout in Congress, Democrats called for a limit
to benefits that executives of financial institutions that receive public funds
receive so they can be held partly responsible for the failure of their banks.