Bush announces 'unprecedented' step to address financial crisis

President Bush announced the moves in an early morning statement from the Rose Garden, after meeting with his top financial advisors ahead of the opening of U.S. markets.

He said the measures may "seem distant" from the everyday concerns of Americans worried about their jobs and daily expenses, but they were intended to stabilize the nation's financial system and spur a broad economic recovery.

The strategy closely resembles the path taken by Britain and the European Union, a route credited with reviving faltering stock markets there. The Dow Jones industrial average shot up more than 300 points shortly after it opened this morning, though the large gains later eased. Markets across Europe were soaring, as they did earlier in Asia.

Administration officials released the details of the massive government intervention, whose broad outlines began emerging Monday. They said the programs are intended to be temporary, lasting from one to five years with built-in expiration dates.

The centerpiece is a $250-billion infusion of cash into the banking system. Roughly half will go to nine large U.S. banks and financial institutions that agreed to participate after meetings with Paulson on Monday. Among them are Citigroup, Wells Fargo and Bank of America. The other half of the money will be made available to medium and smaller banks in the coming days.

In exchange for the cash, the federal government will get preferred, nonvoting shares in the banks, with a fixed dividend of 5% for five years, increasing to 9% after that. The goal is to provide money to banks at a fairly low cost for five years to get credit flowing though the financial system.

Banks receiving the money will have to agree to some limits on executive compensation, and Paulson warned them today that they need to use the money to ease the credit crisis.

"At a time when events naturally make even the most daring investors risk averse, the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it," Paulson said.

The plan is a dramatic reversal of course for the Bush administration and a departure from the Republican Party's strong free-market philosophy. But Bush said the programs were "not intended to take over the free market but to preserve it." And Paulson, a former Wall Street executive, said the administration had no choice in the face of growing economic turmoil.

"Government owning a stake in any private U.S. company is objectionable to most Americans, me included," he said. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."

The cash infusions to banks are expected to take place in a matter of days, not weeks.

The $250 billion comes from the first installment of the $700-billion economic rescue package passed by Congress this month. The package was designed to focus on the government purchase of toxic mortgage-backed securities. But the legislation also gave the Bush administration the ability to inject money directly into banks by buying shares.

Officials decided to use the initial $250 billion authorized by Congress as a quicker means of easing the economic crisis. The more complicated plan to buy mortgage-backed securities will go ahead, Bush administration officials said. The rescue package gives Bush access to an additional $100-billion installment of the $700 billion, and he and Paulson were discussing requesting that money for the mortgage purchase plan. That could happen as early as today.

In addition, officials announced details of other steps designed to encourage banks to resume the lending that keeps the U.S. economy moving.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., said that the element of the program intended to restore small business confidence in the banking system would give "unlimited insurance coverage for non-interest-bearing deposit transaction accounts."

"These are mainly payment-processing accounts such as payroll accounts used by businesses," she said. "Frequently they exceed the current maximum insurance limit of $250,000. Many smaller, healthy banks have been losing these accounts to their much larger competitors because of uncertainties in the financial system. This new temporary guarantee, which runs until the end of next year, should help stabilize these accounts and help us avoid having to close otherwise viable banks because of deposit withdrawals."

In addition to helping recapitalize banks, the administration will also try to restart lending between banks by using the FDIC to insure senior preferred bank debt, which commonly includes funds borrowed from other banks.

The program, Bush said, would provide new insurance intended to guarantee accounts used by small business, to restore confidence and stability to the banking system. The Federal Reserve also released guidance today on its plans to become a lender of last resort for U.S. companies by purchasing short-term loans known as "commercial paper." The purchases will begin on Oct. 27.

On Monday, after finance ministers from the major and fastest-growing economies met in Washington over the weekend, stocks soared on hopes that the officials had finally hit on the right formula to thaw the frozen credit system and quell the financial calamity that has hammered giant banks and small investors alike. The Dow Jones industrial average rocketed more than 900 points, its biggest one-day gain.

Times Staff Writers Nicole Gaouette and Tom Hamburger in Washington and Walter Hamilton in New York contributed to this report.

maura.reynolds@latimes.com

james.gerstenzang@latimes.com