Published October 15, 2008
US buys stakes in 9 banks, stems panic
Maximum sum of US$25b invested in Citigroup, JPMorgan, Wells Fargo; others take US$2-12.5b
By ANDREW MARKS NEW YORK CORRESPONDENT

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THE United States Treasury Department, in its boldest move yet to shore up embattled banks, and prevent the collapse of the credit markets and the US economy, is set to undertake steps to directly invest up to US$250 billion in banks, and to guarantee new debt issued by banks for the next three years.

Yesterday morning, before the opening bell on the New York Stock Exchange (NYSE), President George W Bush formally announced the US government's latest effort to stabilise the financial system, ensure the solvency of major US banks and get them lending to one another and businesses again.
Mr Bush said that the proposal, similar to the steps taken by several European governments on Monday, is 'designed to defend free enterprise, not destroy it . . . This is an essential short- term measure to ensure the viability of the American banking system'.
He said that the measures - which will be carried out by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation - will include taking a temporary equity stake in banks, insuring new bank debts and non-interest-bearing deposits.
Shortly after the president spoke yesterday morning, Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson elaborated on the plan at a joint news conference, saying that the recapitalisation plan is open to participants only until Nov 14. It has a maximum of US$25 billion for any one institution. The government will get preferred stock for its equity stake, but without voting rights, which it can redeem after three years.
The preferred stock that each bank will have to issue will pay special dividends, at a 5 per cent interest rate that will be increased to 9 per cent after five years. The government will also receive warrants worth 15 per cent of the face value of the preferred stock.
Half of the US$250 billion, which will come from the US$700 billion bailout approved by Congress, has already been spoken for, with nine major US banks receiving the first US$125 billion. The nine are: Citigroup, JPMorgan Chase and Wells Fargo - US$25 billion apiece; Bank of America and Merrill Lynch - US$12.5 billion each; Goldman Sachs and Morgan Stanley - US$10 billion apiece; and Bank of New York and State Street Bank each received US$2-3 billion.
'Government owning a stake in any private US company is objectionable to most Americans - me included,' said Mr Paulson. 'Yet, the alternative of leaving businesses and consumers without access to financing is totally unacceptable.'
Mr Bernanke said too that the Federal Reserve would become the buyer of last resort for commercial paper, launching a measure that will help businesses get the money they need for day-to-day operations.
Word of the impending US plan first reached Wall Street early Monday afternoon in the midst of what was already a powerful rally based on the coordinated moves from European central banks and governments to guarantee bank debt and prop up financial institutions with billions in taxpayer money.
When the news that Mr Paulson had summoned the heads of the nine largest US banks to his New York City office to explain the terms of the plan reached traders at around 1pm on Monday, the Dow had already registered gains of about 550 points following announcements that the French and German central banks were planning their own multi- billion-dollar efforts to inject capital into the global financial system, along with the announcement that Mitsubishi Bank was going ahead with its US$9 billion investment in Morgan Stanley.
By the end of Monday trading, the Dow had soared 936 points - its biggest absolute gain ever - while its 11.1 per cent jump was the fifth-biggest day ever and the largest percentage advance since 1933. The S&P 500's nearly 12 per cent leap on Monday, matched by the Nasdaq Composite's advance for the day, was its fourth biggest percentage gain in history. Morgan Stanley alone rose a stunning 85 per cent.
At yesterday's opening bell, investors seemed intent on continuing the rally, as bluechip stocks soared 277 points or 3 per cent in the opening minutes. By 10am New York time, the Dow had pulled back to a gain of 190 points to 9,577.4, which was 1,690 points above its Friday intraday low of 7,882, while the S&P 500 was up 17.14 points, or 1.71 per cent to 1,020.5. The Nasdaq Composite was off 12 points, or 0.67 per cent.
Market strategists said that, at the least, the worst of the panic was over, but cautioned that the market's enthusiastic reaction to the events of the last two days doesn't mean that stocks are set to recover all or even most of the losses they've been bludgeoned by over the past six weeks.