WASHINGTON - President Bush has announced a $250 billion plan by the government to buy shares in banks, in the latest move to calm the turmoil in the financial markets and stave off a deep recession.
Bush, in the latest of a series of statements on the troubled economy, said that and other steps will help restore confidence and "return our economy to the path of growth and prosperity."
The president made his statement in the Rose Garden of the White House after an early morning meeting with his economic advisers.
THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.
WASHINGTON (AP) — The Bush administration will spend $250 billion this year to purchase stock in banks and take a number of other bold steps in an effort to combat a global credit crisis that is threatening to push the country into a deep recession, industry and government officials say.
President Bush was scheduled to announce the new initiatives early Tuesday after executives of the country's biggest banks were summoned to a remarkable meeting at the Treasury Department on Monday. Treasury Secretary Henry Paulson basically told the bank CEOs that they had to accept the government stock purchases for the good of the U.S. economy.
The administration plans to spend $250 billion of the $700 billion government rescue program passed by Congress on Oct. 3 to make stock purchases this year. The first purchases will be in nine large banks, officials said. The industry and government officials spoke on condition of anonymity because the details were yet to be formally released.
The decision represents a remarkable turnaround for the $700 billion rescue program, 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.
Major stock markets around the world surged higher Monday as traders began to hear of new actions being taken in Europe, where governments put $2.3 trillion on the line Monday in guarantees and other emergency measures to save banks there.
On Wall Street, the Dow Jones industrial average soared by a one-day record of 936 points. But all the stock gains came after staggering losses in the previous week and economists said more rough days can be expected until there are clearer signs that the credit crisis is lessening.
World markets soared for a second day Tuesday, led by a record 14 percent jump in Japan's benchmark Nikkei 225 index.
In The Wall Street Journal on Tuesday, Federal Reserve chairman Ben Bernanke wrote: "Our strategy will continue to evolve and be refined, and we will adapt to new developments and the inevitable setbacks. 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."
While the administration refused to provide details in advance of Bush's appearance, industry and government officials who were briefed on the proposals said the stock purchase was aimed at bolstering depleted capital reserves as a way of getting the institutions to resume more normal lending patterns.
After the purchase of preferred stock in nine large banks, the program is expected to be expanded to many others. Among the initial banks participating will be all of the country's largest institutions, including Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp. and Morgan Stanley, said one official, with each institution expected to receive billions of dollars in return for the sale to the government of preferred shares.
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.
Bush will certify Tuesday that another $100 billion is needed from the $700 billion rescue program. That would leave the final $350 billion to be spent, probably by the next president.
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, the officials who were briefed on the program's details said.
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 officials said the FDIC would remove for a period 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.
Democrats in Congress, while supportive of Paulson's desire to expand the program, complained Monday that not enough strings were being attached, such as restricting excessive compensation for Wall Street executives who raked in millions of dollars in bonuses by pursuing risky investment strategies that now have helped push the U.S. financial system to the brink.
The government should purchase only stock in financial firms that agree to cut dividends paid to shareholders, adhere to strict limits on executive compensation and curb their use of exotic investment strategies, Sen. Charles Schumer, D-N.Y., chairman of the Joint Economic Committee, argued.
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.
In a campaign speech in Ohio, Democratic presidential nominee Barack Obama proposed a 90-day moratorium on home foreclosures at some banks and a two-year tax break for businesses that create new jobs. His Republican opponent, John McCain, promised a change in direction from the Bush administration's economic policies.
The administration on Monday announced a series of steps to get the rescue program under way, including selecting a team of interim managers, picking an outside firm to help run the program and choosing a prominent New York law firm to draw up guidelines for how the stock purchase program will work.