The U.S. government released on Tuesday a plan to take equity stakes worth up to $250 billion in financial institutions. The incursion into the private sector was called a regrettable alternative of last resort by the regulators, but a necessary one that will help strengthen public confidence in the financial institutions and ensure the proper functioning of the U.S. financial system.
Following the Euro-group countries, which on Monday endorsed the principles of the British bank-recapitalization plan for their own economies, the U.S. regulators announced the government will buy preferred equity stakes in nation’s largest Banks: Goldman Sachs (GS), Morgan Stanley (MS), J.P. Morgan (JPM), Bank of America (BAC) — including the soon-to-be acquired Merrill Lynch (MER) — Citigroup (C), Wells Fargo (WFC), Bank of New York Mellon (BK) and State Street Corp (STT). The banks will have a month to join Treasury’s capital purchase program. The participation, if they elect to do so, must be done before 5 p.m. on Nov. 14, ’08.
U.S. President George W. Bush in a televised address stressed that: “These measures are not intended to take over the free market but to preserve it. This is an essential short-term measure to ensure the viability of America’s banking system”, Mr. Bush said.
In a joint statement by Treasury, The Federal Reserve and FDIC, the regulators introduced the implementation of an action plan and strategy with three important measures.
First, Treasury announced a voluntary capital purchase program where many financial institutions are eligible to participate by selling preferred shares to the U.S. government on attractive terms that protect the taxpayer.
Second, after receiving approval from the FDIC and the Federal Reserve, and consulting with the President, Secretary Paulson signed the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding co’s, as well as deposits in non-interest bearing deposit transaction accounts.
Third, to further increase access to funding for businesses, the Federal Reserve has announced that beginning October 27, the commercial paper facility will fund purchases of commercial paper of 3 month maturity from high-quality issuers. Mr. Bernanke said the U.S. will not ‘stand down’ until financial system and prosperity are restored.
Mr. Paulson, in his own remarks, said financial institutions in the new program will limit executive compensation. He also added that the Treasury will buy nonvoting preferred shares in major financial institutions, with stakes in each limited to $25 billion. Bank executives must accept limits on their pay.
Formulated jointly by the Treasury, the Fed and the FDIC, these moves announced Tuesday are designed to restore and stabilize liquidity in the financial system and ensure economic growth.