Bush outlines measures to aid US banks, restore confidence

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Oct 14: US President George W Bush on Tuesday outlined steps to purchase equity stakes in US banks and temporarily expand government guarantees on new debt to revive credit markets and restore confidence in the financial system.

“This is an essential short-term measure to ensure the viability of the US banking system,” Bush said at the White House after meeting with his Working Group on Financial Markets, which includes treasury secretary Henry Paulson and Federal Reserve chairman Ben S Bernanke.

The US will invest about $125 billion in nine of the nation’s biggest financial institutions, including Citigroup Inc and Goldman Sachs Group Inc, as part of a $250-billion effort to shore up the banking system. The other companies are Wells Fargo & Co, JPMorgan Chase & Co, Bank of America Corp, Merrill Lynch & Co, Morgan Stanley, State Street Corp and Bank of New York Mellon Corp, said people briefed on the plan.

The proposed cash infusions in exchange for preferred shares are part of the $700-billion rescue approved by Congress and follow similar moves by European leaders to unfreeze credit markets by helping beleaguered banks.

Bush said the Federal Deposit Insurance Corp will begin guaranteeing most new debt, and the agency also will offer insurance on non-interest-bearing accounts used by small business for payrolls. “This is a key source of short-term financing for American businesses and financial institutions,” he said.

“We have a strategy that is broad, that is flexible,” the president said. “We will return our economies” to growth and prosperity, he said. Bush’s announcement followed a meeting between US banking executives and federal officials on Monday on revamping the economic bailout plan.

Later, Paulson urged banks receiving the $250 billion in capital injections to use the funds to spur economic growth. “We must restore confidence in our financial system,” Paulson said at a press conference in Washington. ``The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”

Paulson said the treasury would dedicate $250 billion for boosting bank capital through preferred stock purchases. Participating banks will need to accept limits on executive pay and so-called golden parachute payments.