Treasury Secretary Henry Paulson plans to use $250 billion of taxpayer funds to purchase stakes in thousands of financial firms to halt a credit freeze that threatened to bankrupt companies and hammer the job market.
“Leaving businesses and consumers without access to financing is totally unacceptable,” Paulson said in Washington. He rolled out the emergency program after a crisis of confidence in the financial system last week spurred the biggest stock sell- off since 1933. Paulson urged companies getting the government funds to “deploy” the money in loans.
The Treasury chief was forced to change tack from an initial plan to buy distressed assets from banks after the financial panic caused banks to hoard cash and send money market rates to record levels. In its biggest effort yet to halt the 14-month credit rout, officials will also offer guarantees on new bank debts and start purchasing commercial paper in two weeks.
The Treasury’s stock buying program will begin with nine banks, which it didn't name. People briefed on the matter said $125 billion will be put in the nine: Citigroup Inc, Goldman Sachs Group Inc, Wells Fargo & Co, JPMorgan Chase & Co, Bank of America Corp, Merrill Lynch & Co, Morgan Stanley, State Street Corp and Bank of New York Mellon Corp.
“These are healthy institutions, and they have taken this step for the good of the US economy,” Paulson said. “These institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending,” President George W. Bush’s working group on financial markets said in a separate statement.
White House Meeting: Bush today said “this is an essential short-term measure to ensure the viability of the US banking system,” after meeting with Paulson, Federal Reserve Chairman Ben S Bernanke and other members of the working group, which includes the Securities and Exchange Commission and Commodity Futures Trading Commission.
Stocks rose around the world on expectations the rescue will help alleviate the credit crisis. The Standard & Poor’s 500 Stock Index gained 3.1 percent to 1,034.14 at 9:42 am in New York after climbing 12 percent yesterday. The index lost 18 percent last week.
With the equity purchases, Paulson is using more than a third of the $700 billion in government support Congress gave him the authority to use on October 3.
Participating banks will need to accept limits on executive pay and so-called golden parachute payments. They also will need to give the Treasury warrants for an amount equal to 15 per cent of the senior preferred investment, with a strike price determined by the bank's share price at the time of issuance.
Dividend Payments: The senior preferred shares will pay a dividend of 5 per cent for the first five years and 9 per cent after that, the Treasury said. The purchase price of the stock will be the market price of the banks' common shares at the time of the transaction. Companies will be able to buy back the equity at par after three years.
The government expects to purchase equity in the nine banks within days and to use the full $250 billion by year-end, a Treasury official told reporters on condition of anonymity. While banks would not be forced to cut existing dividends, there would be some restrictions on raising them, the official said.
The U.S. initiative followed an announcement that France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion to guarantee bank loans and take stakes in lenders.
Europe's Dow Jones Stoxx 600 Index today climbed 3.4 percent. The MSCI Asia Pacific Index surged 9.3 percent today, the most since 1998, with Japan's Nikkei jumping 14 percent as trading resumed following yesterday's public holiday.
Losses Soar
Banks have struggled to regain the confidence of investors, counterparties and clients after bad loans caused $637 billion of writedowns and losses across the industry.
Last week, the International Monetary Fund estimated that banks around the world would need $675 billion in fresh capital over the next several years to recover. The IMF also said Oct. 7 that financial losses would total $1.4 trillion, an almost 50 percent increase from a prediction in April.
Under the plans announced today, the FDIC said it would fully guarantee newly issued, senior unsecured debt and non- interest bearing deposits. The expanded coverage applies to all senior unsecured debt issued on or before June 30, 2009, and deposits in FDIC-insured banks until Dec. 31, 2009.
The Fed said in a separate statement that its previously announced program to buy commercial paper will start on Oct. 27. Officials haven't indicated a limit for the total size of the fund.
Financial firms participating in the U.S.'s so-called voluntary capital purchase program will need to step up their efforts to stem mortgage foreclosures, Paulson said today. That targets the original spark of the crisis, caused by lax lending terms on subprime home loans.
''The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it,'' the Treasury chief said.
To contact the reporter on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net.
