Page last updated at 14:39 GMT, Tuesday, 14 October 2008 15:39 UK

Q&A: US $700bn bail-out plan

Man walks into AIG headquarters in New York
The crisis in financial markets has led to the comprehensive bail-out plan

The US government has unveiled a $250bn (143bn) scheme to purchase stakes in leading American banks.

Announced by President George W Bush and US Treasury Secretary Henry Paulson, the move is the first stage of the government's wider $700bn bail-out plan aimed at rescuing the US financial system.

What is the $250bn being spent on?

The government is buying stakes in a "wide variety" of banks and thrifts - financial institutions similar to building societies in the UK.

Effectively part-nationalisation, nine banks - which Mr Paulson described as "healthy institutions" - have so far signed up to the deal.

The government will be given preference shares in the banks.

Preference shares pay a fixed rate of interest instead of a dividend, which has to be paid before other shareholders receive anything, but they do not carry voting rights.

Banks that receive the cash injections will be subject to restrictions on executive pay.

US taxpayers may even end up making a profit from the shares if the rescue packages work and the banks recover, but that is not guaranteed.

Haven't some other measures also been announced?

Yes. US federal authorities will also temporarily insure most new debt issued by US banks.

In addition, Mr Bush said that the Federal Reserve would finalise work on a new programme that would make it the buyer of last resort for companies' short-term debt, known as commercial paper.

Furthermore, government deposit insurance is being expanded to cover accounts used by small businesses.

Mr Bush has insisted that all the measures will only be temporary.

"This is not intended to take over the free market, but to preserve it," he said.

Why do banks need a bail-out?

To restore both stability and confidence.

Led by US banks, the world's financial markets have found themselves in deep trouble after many commercial lenders invested heavily in the US mortgage market.

Since the housing bubble burst, banks around the world have been left with millions of dollars worth of bad debt.

As a result, they are reluctant to lend to each other as they worry their rivals might get into trouble.

Already the credit crisis has resulted in the collapse of several large financial institutions - both in the US and in Europe.

Mirroring similar moves in Europe, the US government is now continuing efforts to aid the banking sector.

Mr Paulson said taking equity stakes in banks was vital to restore confidence, despite it being "objectionable to most Americans, including myself".

How is the US government planning to finance the wider 700bn scheme?

The US government plans to borrow the money from world financial markets.

The legislation under which the scheme was passed, gives the Treasury the authority to issue an additional $700bn worth of Treasury securities.

While some commentators are concerned at the move, saying it virtually doubles the size of the budget deficit, the government argues that it intends to get much of the money back.

As already discussed, it plans to be able to eventually sell back the shares it is buying in the major banks.

How will the wider $700bn bail-out affect me?

If you live in the US, another $2,300 will be added to your share of the national debt - though not your taxes.

However, individuals are getting extra protection for their savings accounts, with the amount insured by the US government increasing from $100,000 to $250,000.

In a broader sense, the hope is that the package will help to prevent a meltdown in financial markets which could dry up credit around the world.


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