Bush: $250B to Buy Shares in Banks

Daily News Article   —   Posted on October 14, 2008

(by Jon Ward, WashingtonTimes.com) – President Bush announced a sweeping new plan [this morning] to stave off the economic crisis, which includes using $250 billion to purchase equity shares in major U.S. banks, the expansion of insurance for bank deposits, and other steps designed to free up the flow of capital between and among financial institutions.

“These measures are not intended to take over the free market, but to preserve it,” Mr. Bush said, during a statement in the Rose Garden.

The $250 billion will come out of the $700 billion that Congress gave to the Treasury Department earlier this month, which originally was all going to be used to buy up troubled assets from financial institutions.

“We must restore confidence in our financial system,” said Treasury Secretary Henry Paulson, who used even stronger language than the president to describe his instinctive aversion to this massive government intervention.

“Government owning a stake in any private U.S. company is objectionable to most Americans, me included,” Mr. Paulson said. “But the alternative to leaving businesses and consumers without access to financing [getting a loan; borrowing money] is totally unacceptable.”

“We are acting with unprecedented speed, taking unprecedented measures that we never thought would be necessary, but they are necessary,” he said.

Mr. Paulson also said it is vital that the major banks receiving government money should “not take this new capital to hoard it, but to deploy it.”

By taking the more direct route of recapitalizing U.S. banks, the Bush administration is following the lead of British Prime Minister Gordon Brown, who announced similar steps for British banks late last week.

U.S. markets responded enthusiastically, with the Dow Jones Industrial Index opening up by more than 350 points. On Monday, the Dow had raced to its biggest one-day gain ever in anticipation of the government’s announcement, closing 936.42 points higher than its opening, a gain of 11 percent.

More importantly, key rates governing interbank lending were down, and rates for buying credit default swaps had also fallen.

But Mr. Bush’s new plan amounts to a partial nationalization of the largest American banks.

The president said that the actions were “an essential short term measure to ensure the viability fo America’s banking system.”

The government will buy equity shares with the intent to sell them back to banks once the economy has stabilized and institutions can raise private capital.

Mr. Paulson, who originally opposed taking ownership of U.S. banks, on Monday afternoon met with executives from nine major institutions and urged them to take part in the government’s program, according to press reports.

The nine banks are: Bank of America, Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, State Street and Wells Fargo.

Mr. Bush also announced that the Federal Deposit Insurance Corporation [FDIC] will “temporarily guarantee most new debt” issued by insured banks.

The FDIC will also “expand insurance to cover all non-interest bearing accounts,” which are often used by small businesses to cover day to day operations.

Mr. Bush called these steps “unprecedented and aggressive,” and said a major objective was to encourage banks to resume lending to one another, which they have not done in the past few weeks as capital has dried up.

“When money flows more freely between banks, it will make it easier for Americans to borrow for cars, and homes, and for small businesses to expand,” he said.

Lastly, the Federal Reserve will “soon finalize work on a new program to serve as a buyer of last resort for commercial paper,” Mr. Bush said.

“This is a key source of short-term financing for American businesses and financial institutions. And by unfreezing the market for commercial paper, the Federal Reserve will help American businesses meet payroll, and purchase inventory, and invest to create jobs.”

The president tried to reassure Americans that “the government role will be limited and temporary.”

“Each of these new programs includes safeguards to protect taxpayers,” he said.

Global markets had responded enthusiastically to similar measures taken in Europe on Monday, with Japan’s Nikkei market gaining 14.5 percent on Tuesday — its biggest one-day gain ever — after huge losses last week.

European markets were up by an average of five percent.

Copyright 2008 News World Communications, Inc.  Reprinted with permission of the Washington Times.  This reprint does not constitute or imply any endorsement or sponsorship of any product, service, company or organization.  Visit the website at www.washingtontimes.com.

Background

On the U.S. Treasury Department (from the Treasury Department website)  (Read more at ustreas.gov/education/duties.)

The Treasury Department is the executive agency responsible for promoting economic prosperity and ensuring the financial security of the United States. The Department is responsible for a wide range of activities such as:

• advising the President on economic and financial issues
• encouraging sustainable economic growth
• fostering improved governance in financial institutions
• The Department of the Treasury operates and maintains systems that are critical to the nation's financial infrastructure, such as the production of coin and currency, the disbursement of payments to the American public, revenue collection, and the borrowing of funds necessary to run the federal government.
• The Department works with other federal agencies, foreign governments, and international financial institutions to encourage global economic growth, raise standards of living, and to the extent possible, predict and prevent economic and financial crises.

NOTES ON THE ECONOMIC CRISIS: [from the WorldMag.com article "House and Home"]

[Over the past 10 years or so, mortgage companies] made huge profits by telling borrowers that poor credit or low incomes didn't matter. Some borrowers were confused about the terms, and unwittingly agreed to mortgages they didn't understand. Other borrowers lied on mortgage applications about their income and assets, and some lenders never bothered verifying information.

Since the 1990s, Congress has encouraged more lending to more low-income borrowers [people who couldn't actually afford to purchase houses] through government-sponsored institutions Fannie Mae and Freddie Mac, hoping to boost home ownership among a group that often rents. After accounting scandals [at Fannie Mae and Freddie Mac] in 2003 and 2004, the companies accelerated their lending to low-income and subprime borrowers, sometimes to placate Congressional leaders. Legislators also benefited from the arrangement by bringing more loans to their local communities.

By June 30, 2008, Fannie Mae reported holding subprime ... loans worth a total of $619 billion .... Freddie Mac's reporting wasn't as detailed, but [it is] estimated [that] the institution carried at least $392 billion in similar loans. With default rates skyrocketing, neither group could manage the losses without massive government intervention.