Washington - The United States Tuesday joined key European
governments in the coordinated rush to buy up shares in the world's
leading banks in the latest bid to restore confidence in the
financial system.
US President George W Bush announced an 'unprecedented and
aggressive plan' to infuse 250 billion dollars into the American
banking sector to calm markets and ensure 'growth and prosperity.'
The announcement came before stock markets opened in New York,
where indices continued to rise after Monday's huge comeback that
followed similar actions by European countries designed to free up
credit flow.
The government move to partially nationalize banks marked another
departure from the free market principles especially dear to Bush's
centre-right Republican Party.
US Treasury Secretary Henry Paulson, who just weeks ago told
Congress that buying bank shares would be a mistake, made clear how
repulsive the move was to those ideals.
'Government owning a stake in any private US company is
objectionable to most Americans, me included,' Paulson said. 'We
regret having to take these actions.'
But the rising lack of confidence in the system 'poses an enormous
threat to our economy' and needs to be addressed with drastic
actions, Paulson said.
'Investors are unwilling to lend to banks, and healthy banks are
unwilling to lend to each other and to consumers and to businesses,'
he said.
Paulson and Federal Reserve chief Ben Bernanke were confident that
there was plenty of cash still left in the banking system, where
hundreds of firms have remained healthy but reluctant to lend money.
Paulson said nine large and 'healthy' financial institutions had
already agreed to participate in the programme 'for the good of the
US economy' and he hoped many more would join.
The government will attach strings to its investments, insisting
on limits on executive pay and a ban on golden parachutes. It would
also expect that participating firms would not 'hoard' the cash.
The move follows weeks of unprecedented stock market volatility as
the US government, followed by individual European and other
governments, used a desperate patchwork of solutions to stem losses
from the collapse of the US housing bubble.
Even the passage little more than a week ago of the US
government's 700-billion-dollar financial rescue plan failed to halt
the plunge or free up credit.
Under the newest plan, 250 billion dollars of the rescue money
will be used to buy equity shares in banks.
Banks would be expected to buy back the shares as soon as they can
'raise capital from private investors,' Bush said.
Other steps call for the government's insurance programme for
personal bank deposits to be expanded to cover new debt issued by
insured banks and to back accounts used primarily by small businesses
to cover day-to-day operations.
In addition, the US central bank was preparing to serve as 'buyer
of last resort' for commercial paper that enables American businesses
to meet payrolls and purchase inventory, Bush said.
Bush cautioned that it would take some time until all the state
measures would have their full effect.
According to US media reports, the nine banks already signed on
to the plan are Bank of America, Bank of New York Mellon Corp,
Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase, Merrill
Lynch, Morgan Stanley, State Street Corp and Wells Fargo.
Bernanke welcomed the 'global response to the crisis' which
emerged from a meeting over the weekend of the finance ministers and
central bankers of the G-7 industrialized countries.
Federal Deposit Insurance Corporation chairman Sheila Bair
defended the latest move, noting that had the US not acted Tuesday
it would have put US banks 'on an uneven playing field.'
Bernanke, an academic expert on the Great Depression of the 1930s,
said that after a year of increasing efforts to address the growing
number of mortgage defaults, he believed the latest 'comprehensive
and broad-based' move came soon enough to avoid another such crash.
'History teaches us that government engagement in times of severe
financial crisis often arrives very late, usually at a point at which
most financial institutions are insolvent or nearly so,' he said.
USA
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