WASHINGTON — The Bush administration plans to spend $250 billion of the $700 billion bailout buying stock in private banks, greatly expanding protections for the U.S. financial system out of deep concern for the faltering economy, industry and government officials said Monday night.
President Bush planned to announce the details this morning.
Agreement on the plan came after a remarkable Treasury Department meeting between top government economic officials and executives of the nation’s largest banks to revamp the most costly financial rescue in the nation’s history.
The plan also would provide a way for the government to insure loans that banks make to each other, a critical part of the credit system that has become frozen and put many businesses in peril.
Monday night, the Treasury Department said the administration had decided on “comprehensive actions” to bolster public confidence in the nation’s financial system. Bush was to be briefed early today by economic advisers and then announce the plan, which the Treasury said was designed to “restore functioning of our credit markets.”
While the administration refused to provide details in advance, industry and government officials with knowledge of the plan said it would include billions of dollars in spending by the government to purchase stock in banks as a way of providing them desperately needed money so they could resume more normal lending.
The administration will use $250 billion of the bailout program recently passed by Congress to buy into U.S. banks, the officials said. The government initially will purchase stock in nine large banks, but the program is expected to be expanded to many others. Among the initial banks participating will be all of the country’s largest institutions, including Citigroup Inc., Wells Fargo &Co., JPMorgan Chase &Co, Bank of America Corp. and Morgan Stanley, said one official, who added that administration briefers did not provide any amounts that would be received by individual banks.
The administration expects to spend the $250 billion buying bank stock before the end of this year, this official said. Bush will acknowledge today that another $100 billion is needed from the $700 billion rescue program. That would leave the final $350 billion to be spent.
In addition to the stock purchases, the Federal Deposit Insurance Corp. will temporarily provide insurance for loans between banks, charging the banks a premium for doing so.
This FDIC program would take the form of providing insurance for new “senior preferred” debt that one bank would lend to another. This debt would be insured by the FDIC for three years, helping to unlock bank-to-bank lending, which has fallen dramatically because of fears about repayment in the face of billions of dollars of bank losses because of bad loans, primarily in mortgages.
The officials said that the FDIC would remove for a period the current $250,000 limit on FDIC insurance on bank deposits for non-interest-bearing accounts.
This would primarily benefit businesses who use non-interest-bearing accounts to run their businesses. That money would now be insured, removing the need for these businesses to juggle funds among multiple bank accounts to stay under the $250,000 limit.
Congress as part of the bailout bill temporarily boosted the deposit insurance cap from $100,000 to $250,000.