WASHINGTON – The Treasury Department and Federal Reserve will announce a new, comprehensive financial rescue package today that includes guaranteeing loans between banks and taking direct stakes in troubled banks.
These plans include using about $250 billion from the $700 billion bailout plan recently passed by Congress to provide a capital infusion, via buying equity stakes, to about nine struggling financial firms, according to officials familiar with the plans.
The U.S. approach is modeled after parts of the strong initiatives in Europe, where governments put $2.3 trillion on the line Monday in guarantees and other emergency measures to save banks there.
Heartened by expectations that the U.S. government would soon embrace Europe's aggressive moves, Wall Street traders sent stocks soaring Monday. The Dow Jones industrial average scored its biggest one-day point gain ever and all three major U.S. stock indices had gains of more than 11 percent.
The Dow closed up 936.42 points to 9,387.61. That's all the more remarkable after Friday's first-ever 1,000-point swing in a single day and the index of blue chips briefly falling below 8,000.
Another element of the U.S. plan will provide a Federal Deposit Insurance Corp. guarantee to interbank lending, the loans that banks normally give each other overnight or for short periods of time. Those loans have dried up as banks fear lending to an institution that may prove unable to repay.
The shutdown of interbank lending has caused a global credit crunch that threatens to turn into a global recession.
The Bush administration's plan was explained during a meeting at the Treasury Department that had been called by Treasury Secretary Henry Paulson and included the top executives of the country's largest banks. Federal Reserve Chairman Ben Bernanke also participated in the talks.
President Bush will meet with a working group of the nation's top financial regulators early today, and will then make a statement from the White House Rose Garden before U.S. financial markets open.
The administration also announced the selection of a team of interim managers, picked an outside firm to help run the program and selected a prominent New York law firm to draw up guidelines for how the stock purchase program will work.
Officials also announced that Bernanke had agreed to serve as chairman of the oversight board Congress mandated.
Assistant Treasury Secretary Neel Kashkari, who was tapped by Paulson to be interim head of the program a week ago, said the firm of Simpson Thatcher & Bartlett LLP had been chosen to work on guidelines on stock purchases while the investment consultancy of Ennis Knupp & Associates had been picked to help supervise the selection of the program's private asset managers.
"We are moving quickly – but methodically – and I am confident we are building the foundation for a strong, decisive and effective program," Kashkari said in a speech to the Institute of International Bankers.
All of these are efforts to halt the global financial crisis in its tracks. The Bush administration's new approach reflects how a galloping global financial crisis has quickly outpaced its earlier plan, which sought to spark lending between banks and to corporations by removing distressed assets from bank balance sheets.
Delays in passing this plan in Congress and later strife between European nations as they tried to forge a comprehensive approach sent global financial markets crashing last week. Over the weekend, European leaders rallied behind plans suggested by Britain and adopted a program of interbank loan guarantees and governments taking equity stakes in banks.
Today, Washington will endorse the same approach.
"You have to recognize that it wasn't policy coordination, it was policy emulation in global capital markets, where financial firms have their footprints in many markets," said Vince Reinhart, a former chief economist of the Fed's rate-setting Open Market Committee. "If you do it in one market, you are going to have to do it in another. And that is what happened to the Treasury. Markets work a lot faster than action plans."
Call Kevin G. Hall, McClatchy Washington Bureau, (202) 383-6038. The Associated Press contributed to this report.
