Despite ‘regret,’ U.S. to pour money into banks

updated 2:46 p.m. ET Oct. 14, 2008

WASHINGTON - The government put itself four-square into the country’s banking business Tuesday, resorting to what President Bush conceded was the unwelcome choice of massive government investments in the banking system in order to loosen paralyzed channels of credit.

The president said the decision to buy shares in the nation’s leading banks — a kind of federal intervention not seen since the Depression era — was “not intended to take over the free market but to preserve it.”

But the administration was clearly conflicted by the action.

Said Treasury Secretary Henry Paulson: “We regret having to take these actions. Today’s actions are not what we ever wanted to do — but today’s actions are what we must do to restore confidence to our financial system.”

At a news conference last month, Bush defended his administration’s increasingly aggressive market interventions to deal with the biggest upheavals on Wall Street in seven decades.

“I’m sure there are some of my friends out there saying, I thought this guy was a market guy; what happened to him?,” he said. “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.”

Said Paulson: “Government owning a stake in any private U.S. company is objectionable to most Americans — me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”

Nine major banks will participate initially, including all of the country’s largest institutions. The first bank to take advantage of the new program was Bank of New York Mellon which announced Tuesday that it would sell $3 billion in preferred shares to the Treasury.

Some of the nation’s largest banks had to be pressured by to participate by Paulson, who wanted healthy institutions that did not necessarily need capital from the government to go first as a way of removing any stigma that might be associated with banks getting bailouts.

It was the latest in a long series of moves taken by the administration and the Federal Reserve over the past several weeks to prop up a weakening financial industry. The economic picture in the United States had been darkening for months, but the slump took on new urgency — and had greater global repercussions — amid record-setting selloffs on Wall Street and enactment of a $700 billion bailout bill.

Video   FDIC on new plan Oct. 14: Sheila Bair, head of the Federal Deposit Insurance Corporation, discusses the Bush administration’s revamped bank bailout. CNBC

Under the new multifaceted stabilization program described Tuesday, the government will initially buy stocks in major banks. When financial markets stabilize and recover, the banks are expected to buy the stock back from the government, Bush said in brief remarks from the White House Rose Garden.

“These efforts are designed to directly benefit the American people by stabilizing the financial system and helping the economy recover,” he said.

The Federal Reserve, meanwhile, announced Oct. 27 as the startup date for a program it announced last week to buy vast amounts of short-term debt in an effort to get the commercial paper market functioning more normally.

Fed Chairman Ben Bernanke welcomed all the new steps and made clear that policymakers would continue to take actions as needed to battle the crisis.

“Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable set backs,” he said. “But we will not stand down until we have achieved our goals of repairing and reforming our financial system and thereby restoring prosperity to our economy.”

Revamped bank bailout plan The Bush administration unveiled a revamped bank bailout Tuesday, with plans to pour up to $250 billion directly into leading U.S. institutions. Here are the new plan’s key steps: —The federal government will use part of the recently enacted $700 billion bailout law to inject money into banks by purchasing equity shares. This will help banks continue to make loans to businesses and individuals. —The Federal Deposit Insurance Corp. will temporarily guarantee most new debt issued by insured banks. —The FDIC also will expand government insurance to cover all non-interest bearing accounts, aiding small businesses in covering their day-to-day operations. —The Federal Reserve will finalize a new program to serve as a buyer of last resort for commercial paper. Sources: The Associated Press, msnbc.com

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 ones.

“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.”

He said these steps and other related actions echoed similar bold moves made overseas in an effort to prevent a global recession. Bush said that by restoring confidence in the system, the hope is to “return our economy back to the road of growth and prosperity.”

Bush also said that the efforts to rescue the nation’s battered financial sector was a short-term move to help banks to be able to begin lending again.

Executives of the country’s biggest banks were summoned to a remarkable meeting at the Treasury Department on Monday to be briefed on the plan. Paulson basically told the bank CEOs that they had to accept the government stock purchases for the good of the U.S. economy.

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