Page last updated at 21:09 GMT, Tuesday, 14 October 2008 22:09 UK

US unveils $250bn banking rescue

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President Bush on US government plans to buy shares in banks

The US government has announced a $250bn (143bn) plan to purchase stakes in a wide variety of banks in an effort to restore confidence in the sector.

President George W Bush said the move would help to return stability to the US banking sector and ultimately help preserve free markets.

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

The moves echo similar steps taken by the UK and other European countries.

"This is an essential short-term measure to ensure the viability of America's banking system," Mr Bush said.

We must do this to restore confidence in the financial system
Henry Paulson, US Treasury Secretary

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

Mr Bush also 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.

'Objectionable'

The money will come from the $700bn bail-out package approved by US lawmakers earlier this month.

The US plan - effectively part-nationalisation - comes after the bosses of the country's largest banks were summoned to a special meeting at the US Treasury on Monday.

Treasury Secretary Henry Paulson said that the lack of confidence in the financial system was a threat to the US economy.

He said that taking equity stakes in banks "was objectionable to most Americans, including myself".

"We regret taking these actions," Mr Paulson said.

"But we must do this to restore confidence in the financial system."

Mr Paulson said the government would buy stakes in a "wide variety" of banks and thrifts - financial institutions similar to building societies in the UK.

Nine banks, which Mr Paulson described as "healthy institutions", have so far signed up to the deal.

Federal Reserve chairman Ben Bernanke said that the US strategy would evolve and adapt to new developments:

"We will not stand down until we have achieved our goals of repairing and reforming our financial system," he said.

Share surges

The US announcement - and its anticipation earlier in the day - has had a major impact on global shares:

  • Wall Street's main Dow Jones index opens up 376 points or 4%. However it subsequently falls back, closing down 76.62 points, or 0.82%, at 9,310.99 amid profit-taking
  • The UK's FTSE 100 closes up 137 points or 3.3% at 4,394
  • France's Cac 40 ended up 97 points or 2.75% to 3,629, while Germany's Dax adds 137 points or 2.7% to 5,199
  • Japan's main Nikkei index ended up 1,171 points, or 14%, at 9,448, the biggest one-day rise in its history

Restrictions

The US government said it would buy 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.

European lead

The US move comes a day after the UK said it would inject up to 37bn of taxpayers cash into British banks Royal Bank of Scotland, Lloyds TSB and HBOS.

And European governments that share the euro are putting aside more than 1 trillion euros to protect banks through guarantees and other emergency measures.

The bulk of the money will be used to guarantee lending between banks.

The cash will also be used to take stakes in ailing banks.




MARKET DATA - 11:36 UK

FTSE 100
5429.64up
23.70 0.44%
Dax
5733.05up
19.54 0.34%
Cac 40
3784.02up
14.48 0.38%
Dow Jones
10403.79up
78.53 0.76%
Nasdaq
2273.57up
35.31 1.58%
BBC Global 30
5707.15up
20.65 0.36%
Data delayed by at least 15 minutes


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