WASHINGTON — President Bush unveiled Tuesday morning a comprehensive plan to resuce the nation's ailing financial system, confirming that the U.S. government will take ownership stake in nine U.S. banks and backstop virtually all lending in the country.
Speaking at 8:01 a.m. Bush said the Federal Deposit Inusrance Corp. will guarantee most new loans made by banks. He also said the FDIC would guarantee non-interest bearing bank accounts no matter their size — an important step for small businesses who worried that FDIC insurance limits weren't high enough to cover their business accounts.
Bush, acknowledging how unusual it was to meddle in business, said the new steps weren't intended to change the capitalist system but "to preserve it."
The federal government's direct investment in the banks was not voluntary; the chiefs of the nine banks were told Monday of the plans and told that they had no choice but to accept them.
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The Treasury Department will use $250 billion from the $700 billion financial rescue plan recently passed by Congress to take the equity positions.
The U.S. decision to take an ownership position in the banks came after European nations over the weekend and Monday announced similar programs.
"You have to recognize that it wasn't policy coordination, it was policy emulation in global capital markets, where financial firms have their footprints in many markets," said Vince Reinhart, a former chief economist of the Fed's rate-setting Open Market Committee. "If you do it in one market, you are going to have to do it in another. And that is what happened to the Treasury. Markets work a lot faster than action plans."
The bigger problem dogging the world's financial system rests in credit markets, where banks are hoarding cash. The gauge to show whether things are getting better will come from a variety of lending rates and the spread, or gap, between them and yields on short and medium-term Treasury bonds. U.S. bond markets were closed Monday for Columbus Day, but European credit measures all got a touch better Monday, pointing to the first cracks in a deep freeze.
Delays in passing this plan in Congress and later strife between European nations as they tried to forge a comprehensive approach sent global financial markets crashing last week. Over the weekend, European leaders rallied behind plans suggested by Great Britain and adopted a program of interbank loan guarantees and governments taking equity stakes in banks.
On Tuesday morning, Washington will endorse the same approach, despite the Bush administration's longstanding opposition to government intervention in business and finance. The new approach reflects how a galloping global financial crisis has quickly outpaced its earlier plan, which sought to spark lending between banks and to corporations by removing distressed assets from bank balance sheets.
Heartened by expectations that the Treasury and the Fed would soon embrace more aggressive moves, Wall Street traders sent stocks stampeding back to life on Monday. The Dow Jones Industrial Average scored its biggest one-day point gain ever and all three major U.S. stock indexes scored gains of more than 11 percent.
The Dow Jones Industrial Average closed up 936.42 points to 9387.61. That's all the more remarkable after Friday's 1,000-point swing that sent the blue-chip index briefly to below 8,000.
The broader S&P 500 rallied Monday to close up 104.13 points to 1003.35, while the tech-heavy Nasdaq enjoyed a leap of 194.74 points to 1844.25.
Boosting stocks too was the sheer size of the British and European financial rescue efforts. The leaders of Germany, France, Britain and other nations on Monday put price tags on the plans they'd loosely unveiled on Sunday. Together, the British and European plans involved pledges exceeding $2.5 trillion to restore confidence in fragile financial markets.
London's FTSE exchange responded by rising 8.3 percent, the second highest percentage close on record, according to British newspapers. Exchanges in France and Germany were up 11.2 percent and 11.4 percent respectively. Hong Kong's Hang Seng index started the global rally, closing Monday up 10.2 percent.
Can Monday's global rally, which in the U.S. gained back more than half of last week's losses, continue? Some experts believe so, pointing to the greater clarity that will be gained from direct government investment in troubled banks.
"I think this is a little easier to figure out than buying up the bad assets. I think the market likes it because it is clear, and it is more consistent with what the Europeans are doing," said David Wyss, chief economist with the ratings agency Standard & Poor's in New York. "Attacking it on a global basis seems more and more logical."
Under the U.S. plan to buy shares in financial institutions, government will take preferred stakes that don't harm existing investors. The government won't have a controlling or even voting interests in the institutions, and once they return to stable profitability, the government is expected to sell the stakes to earn taxpayers a profit.
Even so, it's likely that the federal government will be business partners with major banks for years, something that's never happened before — although government has held a close regulatory relationship with commercial banks since the Great Depression.
Europe's banking system is far more concentrated than America's. Many European countries have just a few huge banks, while U.S. banks number in the thousands. That makes the credit freeze a greater risk there.
One problem with the original Treasury approach is that Congress added so many stipulations on transparency and inspections by the Government Accountability Office and other agencies that it may have weighed down Treasury's ability to act quickly.
"If the first thing you do is make sure the GAO has office space, it tells you they are really worried about accountability and that slows you up from really acting," said Reinhart, now a scholar at the American Enterprise Institute, a conservative policy group in Washington. "I don't think asset purchases ever got a chance, since they were put into a slow-motion cycle compared to how markets work, and you had to go to the next thing, and that is capital infusions."
Neel Kashkari, Treasury's new point man for the rescue effort, underscored in a speech Monday just how difficult his task is in moving quickly.
"A program as large and complex as this would normally take months — or even years — to establish. We don't have months or years," he said, outlining a number of bids put out and positions filled in the 10 days since creation of the so-called Troubled Asset Relief Program, or TARP.
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