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

The administration plans to spend $250 billion this year on the stock purchases and the president certified Tuesday that another $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.

The action represents a remarkable turnaround for a rescue program that was already the largest bailout in U.S. history. As the plan sped through Congress, the administration said the money was needed to purchase bad mortgage-related assets that are weighing on the books of financial institutions, never mentioning direct stock purchases.

However, as the financial crisis gained new intensity last week, sending U.S. stocks down by a record amount, the administration decided to shift focus and adopt a bolder program modeled more along the lines of bank rescue efforts being put together in Britain and other European countries.

Bush spoke by phone Tuesday morning with the leaders of Britain, Germany and France, following meetings at the White House on Monday with Italian Premier Silvio Berlusconi. Bush also scheduled for Wednesday a special Cabinet meeting on the economy, White House press secretary Dana Perino said.

On Saturday, he is meeting at the Camp David presidential retreat with French President Nicolas Sarkozy and European Commission President Jose Manuel Barroso.

Tuesday morning’s Wall Street advance took the Dow Jones industrials up more than 400 points at the opening and followed the Dow’s historic 936-point jump Monday, when investors were buying in anticipation of the government’s plan. In later trading Tuesday, stocks gave up most of the early gains.

After the purchase of preferred stock in nine large banks, the new program is expected to be expanded to many others and in fact thousands of banks and savings and loans will be eligible to participate.

The nine initial banks participating are Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase, Bank of America Corp, including the soon-to-acquired Merrill Lynch, Citgroup Inc., Wells Fargo & Co, Bank of New York Mellon and State Street Corp.

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.

At a briefing, Treasury officials said that the first purchases of stock from the nine major banks will begin within days and will total $125 billion. The government expects to spend the entire $250 billion slated for the bank stock purchase program by the end of the year.

In addition to the stock purchases, the Federal Deposit Insurance Corp. will temporarily provide insurance for loans between banks, charging the banks a premium for doing so.

This FDIC program would take the form of providing insurance for new “senior preferred” debt that one bank would lend to another. This debt would be insured by the FDIC for three years, helping to unlock bank-to-bank lending, which has fallen dramatically because of fears about repayment in the face of billions of dollars of bank losses because of bad loans, primarily in mortgages.

The FDIC will also remove temporarily the current $250,000 limit on FDIC insurance on bank deposits for non-interest-bearing accounts. This primarily would benefit businesses who use non-interest-bearing accounts to run their companies. That money now would be insured, removing the need for companies to juggle funds among multiple bank accounts to stay under the $250,000 limit.

Congress, as part of the bailout bill, temporarily boosted the deposit insurance cap from $100,000 to $250,000, an action that will not be affected by the new program.

The $700 billion rescue program will continue to feature the purchase by the government of banks’ bad assets, but the administration decided to place greater emphasis on the stock purchase program after doubts were raised about how long it might take to get the asset purchase program up and running.

Treasury officials said Tuesday that they still plan to buy troubled assets and that this program would start as soon as possible. To move that effort ahead, Treasury announced on Tuesday that it had selected Bank of New York Mellon to serve as the manager for the accounting portion of the bad asset program. It still must select the five to 10 big asset management firms that will run the purchase effort and manage the assets that are purchases.

House Financial Services Chairman Barney Frank, D-Mass., said he strongly supported Treasury’s decision. He had urged the administration to include provisions for bank stock purchases as part of the rescue package.

Paulson said companies which sell stock to the government will be required to accept restrictions on executive compensation including a ban on golden parachutes for the period in which Treasury holds the banks’ stock.

Worried about the slumping U.S. economy only three weeks from the elections, House Republicans and Democrats on Monday pushed for fresh action to prevent a serious downturn. Democrats scheduled hearings to consider a postelection stimulus package that could cost as much as $150 billion. Republicans called for more tax cuts and energy exploration.

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