By Arun Kumar, IANS,
Washington : As the US Tuesday unveiled an “unprecedented and aggressive” plan to pour at least $250 billion to partly nationalise nine major banks and expand federal insurance protection, the Wall Street was on the upward curve again.
In an early morning speech from the White House, President George W. Bush described the administration’s plan as an “essential short term measure to ensure the viability of American’s banking system”.
“These measures are not designed to take over the free market but to preserve it,” he said to reassure Americans that the dramatic proposal was not meant to undermine the country’s free market principles.
Treasury Secretary Henry M. Paulson in fact went a step further calling parts of the proposal “objectionable… Today’s actions are not what we ever wanted to do”.
As the markets opened an hour after the Bush speech, stocks surged again adding to Monday’s historic rally. The Dow Jones industrial average jumped 363 points in the early going. The Standard & Poor’s 500 index added 3.9 percent and the Nasdaq composite gained two percent.
The reports of the broad details of the plan had sparked the biggest jump in stocks in history Monday with the Dow industrials soaring some 936 points or 11 percent. The S&P 500 and Nasdaq also hit point-gain records.
Nine of America’s largest banks have already agreed to take capital from the government and in return give preferred shares to taxpayers and limit executive pay. It is widely expected that half of the $250 billion will go to those nine banks.
Paulson stressed that some of the banks accepting government investment are healthy, but that the infusion of capital will allow them to increase their lending. “The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it,” he said,
Bush also made a formal request for an additional $100 billion to help out financial institutions. Congress had Oct 3 approved a $700 billion financial rescue plan, but it required the president to certify the need for any amount above the initial $250 billion.
The government can use the additional $100 billion to buy troubled assets held by firms or to make additional capital infusions into banks.
The president also announced insurance on all deposits in non-interest bearing bank accounts, a move that allows businesses to no longer worry that their payroll and checking accounts exceeding the limits backed by the Federal Deposit Insurance Corp. And the government will also back most new bank debt.
Bush acknowledged that the US was following steps already taken in Europe. He said that is the best way to address the concerns of US consumers and business leaders.
“I recognize that the action leaders are taking here in Washington and European capitals are distant from those concerns, but they are designed to benefit the American people by stabilising the overall financial system and helping the economy recover,” he said.
After Bush’s announcement, Paulson, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair appeared together to endorse the plan.
“Today, there is a lack of confidence in our financial system – a lack of confidence that must be conquered because it poses an enormous threat to our economy,” Paulson said. “Investors are unwilling to lend to banks, and healthy banks are unwilling to lend to each other and to consumers and businesses.”
For his part, Bernanke said these steps were notable because the government is not waiting for banks to become insolvent before they act.
“Waiting too long to act has usually led to much greater direct costs of the intervention itself and, more importantly, magnified the painful effects of financial turmoil on households and businesses,” he said.
The package represents the government’s most extensive attempt yet to unfreeze frozen credit markets. The aim is to give banks the confidence to make loans to one another and their customers and help provide the economy the source of funds it needs to operate.