Bush Unveils $250B Plan To Buy Bank Shares

U.S. Will Invest Funds Allocated By $700 Billion Bailout Package In Big Banks

(CBS/AP)  Big banks started falling in line Tuesday behind a rejiggered bailout plan that will have the government forking over as much as $250 billion in exchange for partial ownership — putting the world's bastion of capitalism and free markets squarely in the banking business.

Some early signs were hopeful for the latest in a flurry of radical efforts to save the nation's financial system: Credit was a bit easier to come by. And stocks were down but not alarmingly so after Monday's stratospheric leap.

The new plan, President Bush declared, is "not intended to take over the free market but to preserve it."

It's all about cash and confidence and convincing banks to lend money more freely again. Those are all critical ingredients to getting financial markets to function more normally and reviving the economy.

The big question: Will it work?

There was a mix of hope and skepticism on that front. Unprecedented steps recently taken — including hefty interest rate reductions by the Federal Reserve and other major central banks in a coordinated assault just last week — have failed to break through the credit clog and the panicky mind-set gripping investors on Wall Street and around the globe.

The Dow Jones industrials declined 77 points on Tuesday after piling up their biggest point gain ever on Monday on news of Europe's rescue plan and in anticipation of the United States' new measures.

Initially the U.S. government will pour $125 billion into nine major banks with the hope that they will use the money to rebuild their reserves and to increase lending to consumers and businesses. Another $125 billion will be made available this year to other banks — if they need it — for cash infusions.

In return, the government will get ownership stakes in the financial institutions. The shares will pay a 5 percent dividend to taxpayers for the first five years, reports CBS News business correspondent Anthony Mason.

Banks, meanwhile, will have to accept limitations on executives' compensation.

"Government owning a stake in any private U.S. company is objectionable to most Americans — me included," Treasury Secretary Henry Paulson said in announcing the initiative. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."

New York Times columnist and Princeton University economics professor Paul Krugman, who was awarded the Nobel Prize in Economics on Monday, told CBS News there is no guarantees for the plan's success.

"Although most economists I know think this is the right thing to do, no one is sure it will work," said Krugman. "And there will be manic depressive markets as people wonder."

Economist Lakshman Achuthan said the government's investment in the banks was a necessary move for their survival.

"If the U.S. Treasury, the U.S. Government, is putting the full faith and credit of the United States behind an institution, a company, the company is not going to fail," Achuthan told CBS News.

Whether the $250 billion will be sufficient to encourage banks to lend again is hard to tell, said Anil Kashyap, professor of economics and finance at the University of Chicago's Graduate School of Business. The Treasury Department arrived at the $250 billion figure after consulting with banking regulators.

"This plan will work if we wind up with everybody pretty well capitalized," Kashyap said. "But if it doesn't reach that point, we'll be back in soup down the road."

The government is counting on banks not to just clutch onto the cash, which aggravated the credit crisis to begin with.

"The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it," Paulson said.

Treasury switched gears deciding to first use a chunk of the $700 billion from the recently enacted financial bailout package to pay for taking partial ownership stakes in banks, rather than using the money to buy rotten debts from financial institutions. The government said it still intends to buy the bad mortgages and other toxic assets, another move aimed at getting credit flowing again.

Besides the $250 billion this year on the stock purchases, Bush said Tuesday that an additional $100 billion would be needed in connection with covering bad assets. That would leave $350 billion of the $700 billion program, presumably to be spent by the next president.

Economists as well as both Democratic and Republican lawmakers on Capitol Hill had urged Treasury to first move forward on the capital injection plan, arguing that was a more effective way to battle the financial crisis.

The first bank to take advantage of the program was Bank of New York Mellon which announced it would sell $3 billion in preferred shares to the Treasury. Other banks initially participating include Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase, Bank of America Corp., including the soon-to-acquired Merrill Lynch, Citigroup Inc., Wells Fargo & Co., and State Street Corp.

The government's cash infusions are attractive to banks because they are having trouble getting money from 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.

Two other initiative also were unveiled to stem the credit crisis: The Federal Deposit Insurance Corp. launched an insurance fund to temporarily guarantee new issues of bank debt — fully protecting the money even if the institution fails.

And, the FDIC will start providing unlimited deposit insurance for non-interest bearing accounts, which are mainly used by businesses to cover payrolls and other expenses. Frequently these accounts exceed the current $250,000 insurance limit, so the expanded insurance should discourage nervous companies from pulling their money out. Both of these efforts would be financed by fees charged to participating financial institutions — not money from the bailout package.

Even if the new plan works, economists caution that it could take years before locked up lending returns to normal.

The difference between the rate at which banks lend to other banks and the rate at which they buy U.S. government debt has narrowed, but remains near a 25-year high — a glaring sign that there's still fear in the market. But there was a hopeful glimmer elsewhere: A crucial short-term, bank-to-bank lending rate called the London Interbank Offered Rate, or Libor, inched down Tuesday. That rate is important because a lot of commercial loans and many adjustable-rate mortgages are tied to it.

Some of the banks had to be pressured to participate by Paulson, who wanted healthy institutions to go first as a way of removing any stigma that might be associated with banks getting bailouts. Paulson met privately with bank executives on Monday.

The government's shares will carry a 5 percent annual dividend that will increase to 9 percent after five years. That increase in the rate is aimed at providing an incentive for companies to buy the government out. The advantage to the taxpayer is that if the rescue plan works, then the shares can be sold for more than the government initially paid, providing a profit on the transaction.

The move, in effect a partial nationalization of the banking system, does put the United States in the awkward position of owning shares in institutions it also regulates. The shares purchased by the government will be nonvoting. They also give the government a priority in getting paid back if a company fails.

So far this year, 15 banks have failed, compared with three for all of 2007.

"The government's role will be limited and temporary," Bush pledged. "These measures are not intended to take over the free market but to preserve it."

At a news conference last month, Bush defended his administration's increasingly aggressive market interventions to deal with the worst financial crisis in more than a half-century.

"I'm sure there are some of my friends out there saying, I thought this guy was a market guy; what happened to him? Well, my first instinct wasn't to lay out a huge government plan. My first instinct was to let the market work until I realized, upon being briefed by the experts, of how significant this problem became," Bush said then.

The Federal Reserve, meanwhile, announced that it will begin buying vast amounts of short-term debt on Oct. 27 — its latest effort to break through a credit clog. The Fed is invoking Depression-era emergency powers to buy commercial paper — a crucial short-term funding that many companies rely on to pay their workers and buy supplies. Last week the Fed said it intended to take the action but didn't specify when.

The economy's problems also are taking their toll on the government's coffers. The 2008 budget deficit hit an all-time high of $454.8 billion. The red ink probably will be a lot worse next year as the costs of the government's rescue of the financial system and the economic hard times clobber the federal balance sheet, economists predict.

[t_barr]

You might want to checkout Michelle Obama''s rant in the African Press International. The important part is ''...just because some American white racists are bringing up the issue of my husband''s adoption by His step father...''

You see, when Obama was adopted, he lost his US citizenship. He became an Indonesian. The best he could hope for after that was to become a ''Naturalized'' US Citizen.

Naturalized US Citizens are not allowed to become POTUS.

It''s right there, in the African Press International, from Michelle''s own lips. She admits it. That''s it.
GAME OVER!

Go Here;
http://africanpress.wordpress.com/2008/10/15/shocking-development-mrs-obama-decides-enough-is-enough-my-husband-was-born-in-hawaii-and-adopted-by-his-step-father-does-that-make-him-unpatriotic-she-asks-on-a-direct-telephone-to-api

[txgrouch2007]

VOTE EM ALL OUT

VOTE EVERY SINGLE INCUMBENT OUT.

Take back the country.

Posted by notfooled at 01:32 AM : Oct 15, 2008

I agree 100%. It''s time to send a message to remind our government WHO THEY WORK FOR.

[txgrouch2007]

Only two people got this whole thing right; Ron Paul and Ross Perot, and they can''''t get elected. It doesn''''t pay to be right.
Posted by DeckardBr at 02:43 AM : Oct 15, 2008

If the nonsense on these discussion boards is any indication of the general population...

OUR NATION IS UNLEADABLE. Everybody is just acting childish, running around with hands on ears and whooping and hollering what they want to say.

No qualified leader wants to waste his or her life trying to lead the unleadable. They just find something else to lead and retire rich.

Voters can recognize good leaders. They don''t want to be led, so they vote for someone else instead.

[t_barr]

Go Here to Read it;
http://market-ticker.denninger.net

But since you probably won''t do that... I''ll post the best parts HERE!

''Now What Hank?
So you stole $250 Billion that you allegedly were going to buy mortgages with (we knew that was a scam up front, as I said, but heh, you had to keep up the appearances until the ink was dry right?) and blew it on preferred stock in the banks - directly.

Sounds kinda Swedish.

Except its not, because the Swedes, when they had this same sort of problem with their banks, did two things you didn''t:

Forced shareholders to take all loss before taxpayer money was used.
Forced full, complete balance sheet transparency.
The second is the critical item and the one that you and Bernanke have continually refused to address.

Yet this is the root of the problem with trust, when you get down to it.

Nobody trusts the banks to lend to them because they have been shown repeatedly, over the last year, to be lying about their exposures and the state of their balance sheets, to the point of their CEOs showing up on national television days before they filed bankruptcy (as in the case of Bear Stearns)!

You have repeatedly thrown tens or even hundreds of billions of dollars at these institutions and it has, in each and every instance, disappeared into a black hole.

This will continue to happen until the truth is disclosed.''

Part 1

[t_barr]

Part 2

''At best you''ve gotten a transient improvement in the credit markets but as the liars have continued to be exposed, and the prosecutions haven''t begun, the market has come to discount everything you say to zero and now your ''saves'' don''t even get a full day''s worth of market reaction before spreads start to blow out and the stock market once again tanks!

We the people are not stupid Ben and Hank. You can only lie to people, both here in America and elsewhere, for a certain amount of time before your credibility is destroyed - from that point forward people demand proof before believing anything that might come out of your mouth.

You and Ben (not to mention George Bush) crossed that Rubicon months ago.

We know, for example, that Ben threw $630 Billion dollars into the system on the very day you (Hank) were claiming martial law would be imposed in America if you didn''t get ''your'' bill, and yet the credit markets did not unlock.

You got your $700 Billion bill, but the credit markets did not unlock.

A month earlier, you did the same thing with Fannie and Freddie to the tune of $300 Billion, and the credit markets did not unlock.

Today you made your announcement and every bank in the world knew that these institutions in the United States were guaranteed with the full faith and credit of the United States, yet the credit markets still did not unlock!

How much more can you guarantee beyond the full faith and credit of The United States?''

[t_barr]

Part 3

''Answer: There is no further guarantee you can extend beyond the sovereign credit of The US.

You have used the last shell in the gun, and the credit monster singularity is still sucking up all the money.

If this doesn''t work this nation''s economy is finished, and it won''t work because the root cause of this problem isn''t too little liquidity - its that too much liquidity has been provided for too long to cover up insolvencies. This has allowed rampant lying and fraud to become so prevalent that everyone is both doing it and believes everyone else is engaged in it too!

As a result they trust nobody because they are dirty and presume (accurately so, it seems) that everyone else is concealing the same sort of trash they''re hiding.

There is exactly one way to stop this.

You must force full and complete balance sheet transparency for every firm on Wall Street.

Period.

You have put in place the most mighty of guarantees of both solvency and liquidity that you possess - the full faith and credit of The US, in conjunction with the full faith and credit of other G7 nations.

It did not unlock the markets.

Congress: You have listened to Ben and Hank repeatedly sing the same song, and each and every time they do so, you have given them what they demand and what they claim will solve the problem.

In each case the prescribed medicine has been laughed at by the cancer in the financial system, as it has sucked up every dime you have provided.''

There''s more...

[deckardbr]

Only two people got this whole thing right; Ron Paul and Ross Perot, and they can''t get elected. It doesn''t pay to be right.

[bunchofchemi]

I just hope the paltry $700 billion package we put together is enough. The Europeans more than triple our outlay at $2300 billion, and we have more of the bad assets than they do.

[notfooled]

Can no one stop this criminal president from destroying our country?

No sense looking to the rest of our leaders in Washington for help, they''re all on the payroll as well.

IDEAS?

VOTE EM ALL OUT

VOTE EVERY SINGLE INCUMBENT OUT.

Take back the country.

[bunchofchemi]

Since 1929, Republicans and Democrats have each controlled the presidency for nearly 40 years. ... As of Friday, a $10,000 investment in the S.& P. stock market index would have grown to $11,733 if invested under Republican presidents only ... Invested under Democratic presidents only, $10,000 would have grown to $300,671 at a compound rate of 8.9 percent over nearly 40 years.

[incog-nito]

This is not socialism. With socialism taxpayer money goes back to the people in the form of public education, mass transit, universal health care, etc. Private enterprises exist and do very well in so-called "socialist" countries.

This is what you might call "corporatism", where corporations directly influence government decision-making, and the average working stiff is hung out to dry. This has nothing to do with socialism.

[jerr11]

When it comes to spending American taxpayers money no one does it better than the republicans!!



Total Bush debt $10 trillion in 8 years!!

SPEND AND SPEND REPUBLICANS!!

AND LET OUR CHILDREN TAKE CARE OF THE TAB!


BECAUSE WE AIN''T GONNA RAISE TAXES!

[jetjt1]

here''s a real way to help the people
give each legal pearson over the age of 18 -- 1 million dollars with the stipulation that it has to pay off debt.
then tax that money

appx. 250 million people times 1 million = 250 billion
tax it = appx. 200 billion
banks would get paid back , people would start buying stuff and others would retire to bring in more people to the work force = more jobs
problem solved
problem is politicians have there head so far up they can not see what it takes to really help the average person , only there political sponsers

[txgrouch2007]

These republicans sure love to
borrow and spend your money, and your children''''s money
and you grandchildren''''s money, helll,
I could go on forever, thats how longs it will take to pay this debt.
Posted by PythonCharly at 08:34 PM : Oct 14, 2008

Yah! Look at how many of them voted for the bailout - Pelosi, Frank, Clinton, Kerry, Obama... OH, WAIT those aren''t Republicans.

BUT I DIGRESS.

It should now be CLEAR how the present Congress intends to address the looming crisis in Social Security, Medicaid, and whatever other entitlement program that is destined to implode in the next few years -

MORE BAILOUTS!!

They will just KEEP BORROWING, BORROWING, AND BORROWING from the future to pay for the Baby Boomers who have saved NOTHING and who have NO INSURANCE TO PAY for their nursing home care.

The problem is, by then the country will GO BROKE JUST PAYING THE INTEREST on such a massive debt.

Brother, can you spare a dime...

[jerr11]

24 percent approval for Bush!!

This is one ungrateful nation!

Here''s the guy who singlehandedly increased the national debt to $10 trillion.

Killed 4180 of our best!

Decimated our economy with his deregulations and favors to his cronies in Halliburton and the oil industries.

And 24 percent approval rating!!

Who are these loony tunes anyway?!!

[noloyalisti]

Now that we have finally nationalized the banking system, now we just need to do the oil industry and the health care industry. Banking, oil and health care are just too important to be left in the hands of the current fascist American interests.

[edward1975-2009]

Bush announces today, with his rubberstamp Congress at his side, another *** directed at the American taxpayer. But be re-assured people, it won''t be the last, no matter who gets voted in. Funny how they can give taxpayers monies away to everyone but the taxpayers.

[windmaster12]

Thank you GOP
For giving Us:
Immeasurable debt-
Military stretched to implosion-
Failure of our banks
Suspension of Habeus Corpus
Unecessary war for Corporate Profit

And Finally
Socialization of our Financial Institutions

RepugnantCons
The New Reds

[deckardbr]

Is this getting too crazy or what!

[samthetvcat]

---"You ought to hear all the little suckass congressmen on both sides of the aisle giggling with glee over it today."---
Posted by wherenextnow

Ugh, stocks, toxic assets, whatever - it''s like 80% bailout and 20% investment. They don''t get credit for anything because all that mattered is that once the bill was passed it get implemented so that the money go to the lending institutions ASAP and that they be forced to lend ASAP.

I haven''t heard any of them out there pressing Paulson to act . . .