Paulson Endorses Plan To Buy Into Banks

Similar Move Employed During Great Depression; World Financial Leaders Meet On Global Crisis

(CBS/ AP)  The government will buy an ownership stake in a broad array of American banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said late Friday, announcing the historic step after stock markets jolted still lower around the world despite all efforts to slow the selling stampede.

Separately, the U.S. and the globe's other industrial powers pledged to take "decisive action and use all available tools" to prevent a worldwide economic catastrophe.

"This is a period like none of us has ever seen before," declared Paulson at a rare Friday night news conference. He said the government program to purchase stock in private U.S. financial firms will be open to a broad array of institutions, including banks, in an effort to help them raise desperately needed money.

The administration received the authority to take such direct action in the $700 billion economic rescue bill that Congress passed and President Bush signed last week.

Earlier Friday, stock prices hurtled downward in the United States, Europe and Asia, even as President Bush tried to reassure Americans and the world that the U.S. and other governments were aggressively addressing what has become a near panic.

A sign of how bad things have gotten: A drop of 128 points in the Dow Jones industrials was greeted with sighs of relief after the index had plummeted much further on previous days. The week ended as the Dow's worst ever, with the index down an incredible 40.3 percent since its record close almost exactly one year earlier, on Oct. 9. 2007.

Investors suffered a paper loss of $2.4 trillion for the week, as measured by the Dow Jones Wilshire 5000 index, and for the past year the losses have totaled $8.4 trillion.

"The fear has gotten to irrational proportions," David Wyss, an economist at Standard & Poors told CBS News. "We're now assuming when this is over, none of us is going to be living in houses anymore."

It was even worse overseas on Friday. Britain's FTSE index ended below the 4,000 level for the first time in five years; Germany's DAX fell 7 percent and France's CAC-40 finished down 7.7 percent. Japan's benchmark Nikkei 225 index fell 9.6 percent, also hitting a five-year low. For the week, the Nikkei lost nearly a quarter of its value. Russia's market never even opened.

Paulson announced the administration's new effort to prop up banks at the conclusion of discussions among finance officials of the Group of Seven major industrialized countries. That group endorsed the outlines of a sweeping program to combat the worst global credit crisis in decades.

Lakshman Achuthan of Economic Cycle Research Institute told CBS News business correspondent Anthony Mason there needs to be a coordinated global response to the financial meltdown. If not, he said, the crisis will only deepen.

"You're taking a very bad recession, a global recession and you're going to make it much more severe."

Earlier this week, Britain had moved to pour cash into its troubled banks in exchange for stakes in them - a partial nationalization.

Paulson said the U.S. program would be designed to complement banks' own efforts to raise fresh capital from private sources. The government's stock purchases will be of nonvoting shares so it will not have power to run the companies.

The purchase of stakes in companies would be in addition to the main thrust of the $700 billion rescue effort, which is to buy bad mortgages and other distressed assets from financial institutions. The aim is to unthaw frozen credit, get banks to resume more normal lending operations and stave off severe problems for businesses and everyday Americans alike.

It would mark the first time the government has taken equity ownership in banks in this manner since a similar program was employed during the Depression.

In 1989, the government created the Resolution Trust Corp. to deal with the aftermath of the savings and loan crisis. It disposed of the assets of failed savings and loans.

Paulson and Federal Reserve Chairman Ben Bernanke met with their counterparts from the world's six other richest countries late in the day as the rout of financial markets sped ahead despite earlier dramatic rescue efforts in the U.S. and abroad.

In a statement at the end of that meeting, the G7 officials vowed to protect major banks and to prevent their failure. They also committed to working to get credit flowing more freely again, to support the efforts of banks to raise money from both public and private sources, to bolster deposit insurance and to revive the battered mortgage financing market.

They did not provide specifics beyond that five-point framework.

At the White House earlier in the day, Bush said, "We're in this together and we'll come through this together." He added, "Anxiety can feed anxiety, and that can make it hard to see all that's being done to solve the problem."

He made it clear the United States must work with other countries to battle the worst financial crisis that has jolted the world economy in more than a half-century.

"We've seen that problems in the financial system are not isolated to the United States," he said. "So we're working closely with partners around the world to ensure that our actions are coordinated and effective."

The Dow dropped a little over 100 points while he was speaking.

Fear has tightened its grip on investors worldwide even as the United States and other countries have taken a series of radical actions including an unprecedented, coordinated interest rate cuts by the Federal Reserve and other major central banks.

Besides the United States, the other members of the G7 meeting in Washington are Japan, Germany, Britain, France, Italy and Canada. Finance officials also planned to meet with Bush Saturday at the White House.

"We are in a development where the downward spiral is picking up speed," said Germany's Finance Minister Peer Steinbrueck, who wanted to see an orchestrated response among the G7.

So did French Finance Minister Christine Lagarde, who said a "coordinated, synchronized and rightly timed approach" was needed.

An even larger group of nations - called the G20 - will meet with Paulson on Saturday evening. How the world's finance officials and central bank presidents can better contain the spreading financial crisis also will dominate discussions at the weekend meetings of the 185-nation International Monetary Fund and the World Bank in Washington.

The British, who recently announced a plan to guarantee billions of dollar worth of debt held by major banks, have been pitching that idea to the rest of the G7 members.

The idea behind all these ideas - as well as bold steps previously announced in recent weeks - is to get credit flowing more freely again.

In the United States, hard-pressed banks and investment firms are drawing emergency loans from the Federal Reserve because they can't get money elsewhere. Skittish investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers.

The lending lockup - which is making it harder and more expensive for businesses and ordinary people to borrow money - is threatening to push the United States and the world economy as a whole into a deep and painful recession.

In Europe, governments have moved to protect nervous bank depositors. Germany pledged to guarantee all private bank savings and CDs in the country, and Iceland and Denmark followed suit. Ireland went even further by also guaranteeing Irish banks' debts. The United States will temporarily boost deposit insurance from $100,000 to $250,000 in cases where its banks or savings and loans fail.

The Fed, meanwhile, has repeatedly tapped its Depression-era authority to be a lender of last resort, not only to financial institutions but also to other types of companies. Earlier this week, the Fed said it would buy massive amounts of companies' debts, in another unprecedented effort to break through the credit clog.

[t_barr]

http://market-ticker.denninger.net

''Short version of The Genesis Plan is:

- Everyone must expose their balance sheet; all Level 2 and 3 assets must be declared and all models disclosed in full immediately and every quarter hereafter.

- The CDS monster must be caged by forcing it onto an exchange where O/I and margin supervision can be maintained. This is already in process and must be completed.

- Leverage must be returned to no more than 12:1 across the system.

For each of those firms perform a ''cramdown'' of the debt to equity, using the retained value in the bonds to cover the liabilities that rendered the firm insolvent. If there is recovery value then the bondholders get newly issued equity in ratable proportion to their (former) ownership of the bonds. The existing equity is wiped out. The firm, having no balance sheet debt whatsoever, can then immediately raise capital in the market to recapitalize itself.

For those firms that have zero equity remaining, the government can step in and inject capital via a super senior tranche as necessary to establish a working capital base. Remember, with a 6% Tier 1 capital requirement a little goes a long way - $10B injected results in over $160B of available gearing! Protect the taxpayer in these transactions by attaching an onerous coupon to the issue so that it will be rapidly repaid and cleared.

The objection to this plan will be that existing equity holders will be wiped out and bondholders will take a haircut.''

[ubrew12]

Its time to join hands, sing Kumbaya, and support our banks. And if you see any homeless or poor people on your way to help your bank, kick sand in their face. This ain''t socialism, buddy!! Get a job (how about at the bank? I hear they work pretty hard trading thousands of notes of air. They certainly look busy).

[wl7bzh]

Posted by alphaa010 at 03:11 AM : Oct 12, 2008

Nobody likes a blog troll. Your repetitive 5-7 paragraph rants are wearing thin.

[n8yvn29]

Here we find BUSH AND HIS CORRUPT GANG OF THIEVES doing exactly what they had publicly derided the Democrats for suggesting in September, purchasing stakes in the banks. Meanwhile valuable time has been lost and Bush''s banking buddies have made off with our money. As has been stated before, Bush has ruined every business he has been involved in, and now the U.S. economy. Dare we even consider the treasonous acts he has committed against our people (outing a CIA agent, spying on and torturing U.S. citizens, doing away with habeas corpus, etc., etc).

[misha128-2009]

"Paulson said the U.S. program would be designed to complement banks'' own efforts to raise fresh capital from private sources. The government''s stock purchases will be of nonvoting shares so it will not have power to run the companies."

Paulson proposes throwing money at banks with no government control, apparently no priviledged position for recouping the investment and the money can be used for CxO high salaries and golden parachutes.

The answer to this stupidity is no -- the government should be taking a preferred share in the companies and control of management salaries and the end of golden parachutes should be mandatory.

[lastdance127]

CENSORED FROM ABC

The NAZI Fascist Bush Appointee
The Criminal : NAZI Fascist Paulson

Saw this CRASH of WALL-STREET Coming Down over a month
before it Happened __He Gave Himself and His Criminal Banker
Friends Their OWN PERSONAL BAIL-OUT
Three Weeks Before The Crash
Then Let The Rest of The Banking Industry and
Wall-Street come Crashing Down

The Criminal : NAZI Fascist Paulson''s - Personal Stake
In This BAIL-OUT was $700 Million Dollars

ECONOMIC STRIFE That is Being used as a Weapon to
ELIMINATE a DEMOCRACY and REPLACE IT with
The Totalitarian Dictatorship of : A NAZI FASCIST RULE
Against : The Populace of the United States

"ECONOMIC STRIFE" __ The Endorsement of :
The NAZI Fascist Bush Crime Regime and
The Republican NAZI Fascist Party

If your Comments have have been Censored from
ABC News Comments

Contact the : Civil Liberties Union
Ask for a CLASS ACTION LAWSUIT Against :
Brian Ross and The ABC News

Ask The Civil Liberties Union :
To Advertise For People Who Have Been Censored By
Brian Ross and ABC News
To Join in That Class Action Law Suit
http://www.aclu.org/contact/general : (Request Legal Assistance)

[lastdance127]

Censored From ABC :

Wells Fargo Bank REFUSED to get into : Sub-Prime Loans.
Wells Fargo Bank REFUSED to give Loans for homes that were Overpriced
Wells Fargo Bank REFUSED to give loans for : New construction Homes
that were Overpriced

The Actions and the Behavior of Wells Fargo Bank.
Gives clear evidence that : The Entire Banking Industry and
The FBI _ Had clear knowledge that Massive Bank Fraud and
Massive Bank Embezzlement Was Taking Place.

Out of an act of Political Nepotism to : The Bush NAZI Fascist Crime Regime.
For eight (8) Long years. The Political Criminal FBI Refused to :
ACKNOWLEDGE or to ACCEPT any Complaints ! !

People were trying to complain - But ......
Don''t just blame the : Banking Industry for this Mess
Blame also the Organization : The Political Criminal FBI.
Who''s Job it is- and - Is Paid a Wage Package to :
Protect Banking Consumers __ But ... REFUSED ! ! To do just that ! !

The Explanation from the FBI Saying : "They were ordered off the Clock"
(To Stop the Investigation) and We are too Dumb and Stupid _ Just doesn''t GO

Every Common Citizen, Who Knows a Crime is Being Committed,
is obligated by Law. To Report That Crime __ The Political-Criminal FBI,
Gives themselves IMMUNITY from That : OBLIGATION ! !
Even a Ten (10) Year Old Child Knows, When to Disobey an illegal or Criminal Order
No So - For the Political Criminal : FBI

[whitemale08]

Whitemale: Im still re reading you post and I think its sinking in. It was a good post. Simple but to the point. "cancel the DERIVATIVES" If you do this who gets stuck with them?


--------------------------------------------------------------------------------

Posted by lewiston14 at 05:17 PM : Oct 11, 2008--

Good question, because ''canceling derivatives'' means we basicly in the West have stolen all we have in terms of ''standard of living'' for free from manufacturing countries and those that shipp us oil and commodities.

However, part of the deal to these exploited countries is to give them nuclear power plants, mag-lev train systems and let their countries truly be soveriegn my having a fixed-exchange rate so each country is not raided by some downgrade on their bonds from Standad & Poors.

We don''t need to honor these derivatives because they were all gambling bets and then those ''gambling bets'' were used as collateral for credit funding to steal materials and labor from other countries.

Take the entire financial system into bankruptcy reorganization and focus on development for Africa and Latin America and Asia without making a profit through usury.

[talk2chief]

I guess we''''ve plumbed the depths of YOUR wisdom and knowledge of the world.
Posted by txgrouch2007

You are obviously a commodity trader.

[talk2chief]

With the inevitable restrictions on credit, the money supply will SHRINK due to a decrease in the money multiplier.
Posted by txgrouch2007

Not if the government owns the "private" money. That was exactly my point.

[talk2chief]

And please read the Rules of Engagement more carefully before you start making comparisons to events in Germany between the World Wars.

Why is comparing the Weimer Republic a violation of the rules of engagement? Scared of the truth. Re-read the rules of engagement. Nothing says I can''t say Weimer Republic. Don''t tread on freedom of speech because you don''t agree. Also, prices in oil a falling because of increased supply, and lower demand. It happens when people are unemployed and don''t need to drive to work.

[talk2chief]

next time a con artist like Reagan shows up, show him the door.
Posted by andor3

Congress makes laws, and I remember that when Reagan was president it was a democratic majority congress. Oh yeah and deficit spending was a democratic invention long before Reagan.

[talk2chief]

NEXT Step... RUN AWAY INFLATION. Government now prints and owns the "private" money. Does Weimer republic ring a bell! This is absolutely insane.

[andor3]

"George Washington, Thomas Jefferson, initiated deregulation from THE KING OF ENGLAND."

Wow that is really silly. Lack of good regulation led to the market crash in 1929. We fixed that. Reagan started the long and difficult task of un-fixing it. Here we are today. Now we will re-fix it. We should try to remember the lesson this time and next time a con artist like Reagan shows up, show him the door.

[lastdance127]

CENSORED FROM ABC

The NAZI Fascist Bush Appointee
The Criminal : NAZI Fascist Paulson

Saw this CRASH of WALL-STREET Coming Down over a month ago
He Gave Himself and His Criminal Banker Friends Their
OWN PERSONAL BAIL-OUT
Three Weeks Before The Crash
Then Let The Rest of The Banking Industry and
Wall-Street come Crashing Down

The Criminal : NAZI Fascist Paulson''s - Personal Stake
In This BAIL-OUT was $700 Million Dollars

ECONOMIC STRIFE That is Being used as a Weapon to
ELIMINATE a DEMOCRACY and REPLACE IT with
The Totalitarian Dictatorship of : A NAZI FASCIST RULE
Against : The Populace of the United States

"ECONOMIC STRIFE" __ The Endorsement of :
The NAZI Fascist Bush Crime Regime and
The Republican NAZI Fascist Party

If your Comments have have been Censored from
ABC News Comments

Contact the : Civil Liberties Union
Ask for a CLASS ACTION LAWSUIT Against :
Brian Ross and The ABC News

Ask The Civil Liberties Union :
To Advertise For People Who Have Been Censored By
Brian Ross and ABC News
To Join in That Class Action Law Suit
http://www.aclu.org/contact/general : (Request Legal Assistance)

http://www.aclu.org/contact/general
Posted CBS News - Ruters (BBC) - MSNBC - FOX (Others)

[lewiston14]

Whitemale: Im still re reading you post and I think its sinking in. It was a good post. Simple but to the point. "cancel the DERIVATIVES" If you do this who gets stuck with them?

[whitemale08]

It''s funny to watch Republicans reverse their stand on ''free market principles'' when ''reality forces their hand.

The problem with nationalizing all of the banks which might be necessary is that you have to do it under ''bankruptcy reorganization'' so you can cancel the quadrillions in worthless derivatives''.

If you don''t cancel the DERIVATIVES you have no plan and the entire world will be quickly plunged into a New Dar Age.

[Shelly Walker]

It strikes me that if we buy into banks and then the dirivities market crashes, we will have made out situation ten times worse.

[wl7bzh]

Government own the banks? Does anybody remember that Social Security was to be for the retirees and wound up being the Federal Governments private slush fund? Social Security is now backed up with IOU''s called T-bills.

The Federal system of "team player" and "good ol boy" network will make the corruption of Enron look like the proverbial lawn party.

The only thing worse would be to have Jackson/Sharpton as advisers and televangelists as accountants.

[wherenextnow]

Paulson endorses nationalizing banks. Claims to be Republican. Issues press release, "Socialism is the Republican Way".