U.S. will buy ownership stake in banks
Paulson announces historic move to pump liquidity in bid to stop global stock market slide
WASHINGTON — The government will buy an ownership stake in a broad array of American banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said Friday, announcing the historic step after stock markets continued dropping around the world despite efforts to slow the selling stampede.
Separately, the U.S. and the world’s six other industrial powers pledged to take “decisive action and use all available tools” to prevent a global economic catastrophe.
“This is a period like none of us has ever seen before,” Paulson said at a news conference. He said the government program to purchase stock in private U. S. financial firms will be open to a broad array of institutions, including banks, in an effort to help them raise desperately needed money at a time when credit is tight.
The administration received the authority to take such direct action in the $700 billion economic rescue bill that Congress passed and President Bush signed last week.
Earlier Friday, stock prices hurtled downward in the United States, Europe and Asia, even as President Bush tried to reassure Americans and the world that the U.S. and other governments were aggressively addressing what has become a near panic.
A sign of how bad things have gotten: A drop of 128 points in the Dow Jones industrials was greeted with sighs of relief after the index had plummeted much further on previous days. The week ended as the Dow’s worst ever, with the index down 40.3 percent since its record close on Oct. 9, 2007.
Investors suffered a paper loss of $2.4 trillion for the week, as measured by the Dow Jones Wilshire 5000 index, and for the past year the losses have totaled $8.4 trillion.
It was even worse overseas. Britain’s FTSE index ended below the 4,000 level for the first time in five years; Germany’s DAX fell 7 percent and France’s CAC-40 finished down 7.7 percent. Japan’s benchmark Nikkei 225 index fell 9.6 percent, also hitting a five-year low.
Meanwhile, the stunning collapse in oil markets accelerated Friday, sending a barrel of crude plunging below $78, the lowest price in 13 months.
Paulson announced the administration’s new effort to prop up banks at the conclusion of discussions among finance officials of the Group of Seven major industrialized countries. That group endorsed the outlines of a sweeping program to combat the worst global credit crisis in decades.
Earlier this week, Britain had moved to pour cash into its troubled banks in exchange for stakes in them — a partial nationalization.
Paulson said the U. S. program would be designed to complement banks’ efforts to raise fresh capital from private sources. The government’s stock purchases will be of nonvoting shares so it will not have power to run the companies.
The government’s purchase of stakes in companies would be in addition to the main thrust of the $700 billion rescue effort, which is to buy bad mortgages and other distressed assets from financial institutions. The aim is to unthaw frozen credit, get banks to resume more normal lending operations and stave off severe problems for businesses and everyday Americans.
It would mark the first time the government has taken equity ownership in banks in this manner since a similar program was employed during the Depression.
Paulson and Federal Reserve Chairman Ben Bernanke met with their counterparts from the world’s six other richest countries late in the day as the rout of financial markets sped ahead despite earlier dramatic rescue efforts in the U.S. and abroad.
In a statement at the end of that meeting, the G7 officials vowed to protect major banks and to prevent their failure. They also committed to working to get credit flowing more freely again, to support the efforts of banks to raise money from both public and private sources, to bolster deposit insurance and to revive the battered mortgage financing market.
At the White House earlier in the day, Bush said, “We’re in this together, and we’ll come through this together.” He added, “Anxiety can feed anxiety, and that can make it hard to see all that’s being done to solve the problem.”
He made it clear the United States must work with other countries to battle the worst financial crisis to jolt the world economy in more than a half-century.
“We’ve seen that problems in the financial system are not isolated to the United States,” he said. “So we’re working closely with partners around the world to ensure that our actions are coordinated and effective.”
Fear has tightened its grip on investors worldwide even as the United States and other countries have taken a series of radical actions including unprecedented, coordinated interest rate cuts by the Federal Reserve and the central banks in other countries.
