THE BUSH administration will inject a total of $250 billion (€182.6 billion) into its troubled bank sector in a landmark initiative that reshapes the landscape of American business, writes Arthur Beesley, Senior Business Correspondent.
Following similar moves by the governments of Britain, France and Germany, the US Treasury will buy preferred shares to a maximum of $25 billion in qualifying institutions.
"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," President George Bush said yesterday. "This is an essential short-term measure to ensure the viability of America's banking system."
The move to buy shares came as the US government empowered the Federal Deposit Insurance Corporation to temporarily guarantee the senior debt and deposits in non-interest bearing accounts of all institutions it insures.
In addition, the Federal Reserve provided details of a plan that will see the US central bank start buying up three-month commercial paper from businesses.
Federal Reserve chairman Ben Bernanke said: "The actions today are aimed at restoring confidence in our institutions and markets and repairing their capacity to meet the credit needs of American households and businesses."
In the face of a crisis that has brought money markets to a halt and inflicted some of the worst losses for decades on international markets, the US government will invest $125 billion in major institutions and a further $125 billion in small and mid-sized banks.
Citigroup and JPMorgan will receive $25 billion, as will Bank of America, which is acquiring Merrill Lynch, and Wells Fargo, which is acquiring Wachovia.
Goldman Sachs and Morgan Stanley will each receive $10 billion. Bank of New York Mellon and State Street will receive between $2 billion and $3 billion.
To participate, the boards of these institutions will have to introduce restrictions on executive pay. They will have to certify that their pay schemes do not encourage or reward excessive risk taking and payments based on earnings that are later proven to be materially inaccurate will have to be repaid.
The massive injection of federal cash into the banking sector sweeps away a core tenet of US economic orthodoxy, which typically aims to minimise government investment in business and the economy.
The money will come from the $700 billion fund set aside for the troubled asset relief programme (Tarp), the bailout plan with which the US government can buy up toxic mortgage assets.
Confronted with the world's biggest financial crisis since the 1930s, the government's decision to use more than a third of the fund to buy equity in banks implicitly recognises that the Tarp failed to convince the markets.
However, treasury secretary Hank Paulson said the alternative option of leaving businesses and consumers without access to financing was "totally" unacceptable. "Government owning a stake in any private US company is objectionable to most Americans, me included," he said.
