The US government will buy an ownership stake in a broad array of American banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said late on Friday, announcing the historic step after stock markets jolted still lower around the world despite all efforts to slow the selling stampede.
PDF
1 comment:
US to Take Stake in Banks
AP
11 October 2008
The US government will buy an ownership stake in a broad array of American banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said late on Friday, announcing the historic step after stock markets jolted still lower around the world despite all efforts to slow the selling stampede.
Separately, the US and the globe’s other industrial powers pledged to take ‘decisive action and use all available tools’ to prevent a worldwide economic catastrophe.
‘This is a period like none of us has ever seen before,’ declared Mr. Paulson at a rare Friday night news conference.
He said the government program to purchase stock in private US financial firms will be open to a broad array of institutions, including banks, in an effort to help them raise desperately needed money.
The administration received the authority to take such direct action in the US$700 billion (S$1 trillion economic rescue bill that Congress passed and President George W. Bush signed last week.
Earlier on Friday, stock prices hurtled downward in the United States, Europe and Asia, even as Mr. Bush tried to reassure Americans and the world that the US and other governments were aggressively addressing what has become a near panic.
A sign of how bad things have gotten: A drop of 128 points in the Dow Jones industrials was greeted with sighs of relief after the index had plummeted much further on previous days.
The week ended as the Dow’s worst ever.
It was no better overseas. Britain’s FTSE index ended below the 4,000 level for the first time in five years; Germany’s DAX fell 7 per cent and France’s CAC-40 finished down 7.7 per cent.
Japan’s benchmark Nikkei 225 index fell 9.6 per cent, also hitting a five-year low.
For the week, the Nikkei lost nearly a quarter of its value. Russia’s market never even opened.
Mr. Paulson announced the administration’s new effort to prop up banks at the conclusion of discussions among finance officials of the Group of Seven major industrialised countries.
That group endorsed the outlines of a sweeping program to combat the worst global credit crisis in decades.
Earlier this week, Britain had moved to pour cash into its troubled banks in exchange for stakes in them - a partial nationalisation.
Mr. Paulson said the US programme would be designed to complement banks’ own efforts to raise fresh capital from private sources.
The government’s stock purchases will be of nonvoting shares so it will not have power to run the companies.
The purchase of stakes in companies would be in addition to the main thrust of the US$700 billion rescue effort, which is to purchase distressed assets from financial institutions as a way of unthawing frozen credit, getting banks to resume more normal lending operations and staving off severe problems for businesses and everyday Americans alike.
It would mark the first time the government has taken equity ownership in banks in this manner since a similar programme was employed during the Depression.
Mr. Paulson and Federal Reserve Chairman Ben Bernanke met with their counterparts from the world’s six other richest countries late in the day as the rout of financial markets sped ahead despite earlier dramatic rescue efforts in the US and abroad.
In a statement at the end of that meeting, the G7 officials vowed to protect major banks and to prevent their failure.
They also committed to working to get credit flowing more freely again, to support the efforts of banks to raise money from both public and private sources, to bolster deposit insurance and to revive the battered mortgage financing market.
They did not provide specifics beyond that five-point framework.
Fear has tightened its grip on investors worldwide even as the United States and other countries have taken a series of radical actions including an unprecedented, coordinated interest rate cuts by the Federal Reserve and other major central banks.
Besides the United States, the other members of the G7 meeting in Washington are Japan, Germany, Britain, France, Italy and Canada.
Finance officials also planned to meet with Mr. Bush on Saturday at the White House.
‘We are in a development where the downward spiral is picking up speed,’ said Germany’s Finance Minister Peer Steinbrueck, who wanted to see an orchestrated response among the G7.
So did French Finance Minister Christine Lagarde, who said a ‘coordinated, synchronised and rightly timed approach” was needed’.
An even larger group of nations - called the G20 - will meet with Mr. Paulson on Saturday evening.
How the world’s finance officials and central bank presidents can better contain the spreading financial crisis also will dominate discussions at the weekend meetings of the 185-nation International Monetary Fund and the World Bank in Washington.
The British, who recently announced a plan to guarantee billions of dollar worth of debt held by major banks, have been pitching that idea to the rest of the G7 members.
The idea behind all these ideas - as well as bold steps previously announced in recent weeks - is to get credit flowing more freely again.
In the United States, hard-pressed banks and investment firms are drawing emergency loans from the Federal Reserve because they can’t get money elsewhere.
Skittish investors have cut them off, moving their money into safer Treasury securities.
Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers.
The lending lockup - which is making it harder and more expensive for businesses and ordinary people to borrow money - is threatening to push the United States and the world economy as a whole into a deep and painful recession.
In Europe, governments have moved to protect nervous bank depositors.
Germany pledged to guarantee all private bank savings and CDs in the country, and Iceland and Denmark followed suit.
Ireland went even further by also guaranteeing Irish banks’ debts.
The United States will temporarily boost deposit insurance from US$100,000 to US$250,000 in cases where its banks or savings and loans fail.
The Fed, meanwhile, has repeatedly tapped its Depression-era authority to be a lender of last resort, not only to financial institutions but also to other types of companies.
Earlier this week, the Fed said it would buy massive amounts of companies’ debts, in another unprecedented effort to break through the credit clog.
Post a Comment