US bank buy-up aims to restore confidence (Roundup)

By Pat Reber Oct 14, 2008, 15:28 GMT

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.