U.S. Will Invest $250B to Bail Out Banks
Bush: Measures "not intended to take over the free market, but to preserve it."
Oct. 14, 2008 — -- President Bush announced today the United States will embark on a bold plan to buy stakes in ailing banks in what is being called the largest intervention into the U.S. banking sector since the Great Depression.
Treasury Secretary Henry Paulson said the plan will take $250 billion of the $700 billion in the congressional bailout bill.
Bush, speaking from the White House Rose Garden, called the action temporary and necessary to inject capital into banks that have all but stopped lending money. This action is "not intended to take over the free market, but to preserve it," Bush said.
"This new capital will help healthy banks continue making loans to businesses and consumers," Bush added. "And this new capital will help struggling banks. … So they can resume lending and help spur job creation and economic growth."
"Today we are taking decisive actions to protect the U.S. economy," Paulson said. "We regret having to take these actions. Today's actions are not what we ever wanted to do, but today's actions are what we must do to restore confidence to our financial system."
After the Bush announcement, the Dow Jones industrial jumped 300 points at the opening bell.
The nine participating financial institutions include banking giants JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. ABC News confirmed Tuesday that the Treasury Department will buy $25 billion in preferred stock in Bank of America, including Merrill Lynch. It will also buy $25 billion in JP Morgan, $10 billion in Goldman Sachs, $3 billion in Bank of New York Mellon and $2 billion in State Street.
Wells Fargo also issued a statement Tuesday, saying, "In general, we believe the Treasury's plan is a positive step toward providing much needed capital for financial institutions that are in the best position to deploy it effectively to stimulate the U.S. economy and strengthen confidence in the U.S. banking system."
Citigroup also released a statement, saying it backs "the series of bold steps" announced today.
Though the plan is said to be voluntary, several analysts said that the banks did not have much choice but to accept the investment.
The plan was finalized Monday after top financial CEOs were summoned to a meeting with Paulson to discuss the details, which call for the financial intuitions to sell preferred stock to the U.S. government, giving the Federal Reserve System a stake in the companies.
By expanding the scope of the rescue plan to include partial ownership of U.S. banks, leaders hope to stabilize the markets.
Bush also announced additional moves he hopes will make it easier for people to borrow money that include:
Formally announced this morning, the move comes a day after the Dow Jones industrial average rose 936 points, the largest one-day point gain ever and almost twice the previous record rise of 499 points. Monday's jump erased half of the record losses that occurred through all of last week.
In response, world markets surged today. Japan's Nikkei set a single-day record by gaining more than 14 percent. Early trading in Europe showed gains of at least 4 percent in Britain, Germany and France.
U.S. plans follow similar agreements made overseas during the weekend, which allow European countries to pump money into struggling banksto encourage them to start lending again.
Most observers say the bold actions are needed.
"The markets are watching. People are watching," said Raghu Rajan, a professor of finance at the University of Chicago, Monday. "They are nervous and they are willing to have some confidence in the government, but if the governments don't pull it out this time, then the next time the breakdown will be much worse."
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