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US may buy $250b bank stakes in new era
The United States ushered in a new era in banking yesterday with plans to take equity stakes worth up to Dh918.3 billion ($250 billion) in financial institutions, an incursion into the private sector that US officials called a regrettable last resort.
- Agencies
- Published: 23:50 October 14, 2008
New York: The United States ushered in a new era in banking yesterday with plans to take equity stakes worth up to Dh918.3 billion ($250 billion) in financial institutions, an incursion into the private sector that US officials called a regrettable last resort.
The US government followed European powers that agreed to recapitalise their banks a day earlier, triggering a global stock market rebound that continued yesterday.
"This is an essential short-term measure to ensure the viability of America's banking system," US President George W. Bush said in a televised address.
"These measures are not intended to take over the free market but to preserve it," Bush said.
The US Treasury will buy non-voting preferred shares in major financial institutions, with stakes in each limited to $25 billion. Bank executives must accept limits on their pay, and standards of corporate governance.
US Treasury Secretary Henry Paulson said nine banks that he described as "healthy institutions" had agreed to accept government stakes for the good of the US economy - a government intervention unthinkable before the credit crisis, the worst since the 1930s Great Depression.
"Government owning a stake in any private US company is objectionable to most Americans, me included," Paulson said. Bush also said the Federal Dep-osit Insurance Corporation would guarantee new bank debt, temporarily insure senior preferred debt issued by banks and thrifts, and that the Federal Res-erve would become a buyer of last resort of commercial paper - the debt instruments companies use to fund activity.
The latest measures are intended to stimulate interbank lending and the commercial paper markets, whose stagnation may have already pushed the US economy into recession. Some relief was evident in money markets with interbank costs for overnight lending down.
Similar moves in Europe helped restore confidence among investors on Monday.
Britain, Germany, France and others pledged more than 1 trillion euros ($1.36 trillion) in direct capital injections for banks and to underwrite lending between banks that has all but frozen, choking off funds that drive business and industry. Japan joined the global push, saying it could inject public funds into regional banks to make sure small firms can get cash.
The Dow and the S&P 500 slipped after a 4 per cent surge at the open that came one day after both indexes registered their biggest one-day point gain in the wake of last week's panic sell-off. The Nasdaq was down slightly. US bank stocks soared.
European shares rose nearly 3 per cent, also paring earlier gains. Japan's Nikkei climbed more than 14 per cent - its biggest one-day gain in history.
"Clearly the markets are relieved by these actions and see them as a way of ensuring the financial system doesn't collapse in on itself," said David Resler, chief economist at Nomura Securities in New York.
Oil prices
But, he warned, "We're in a period of economic stagnation and contraction. It's probably going to last another few months and into next year, but at the same time this is happening we should be a little encouraged by the drop of oil prices we've had recently."
With three weeks to go before the US presidential election, Republican candidate John McCain yesterday was due to reveal a proposal aimed at helping Americans cope with a sharp plunge in the stock market.
Democrat Barack Obama announced a raft of relief measures on Monday. But the world economic outlook was littered with recessionary signals.
Europe's major econ-omies showed signs of flagging output and falling business confidence.
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