Washington (CBS\AP) -- The Bush administration plans will spend an initial $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 George W. Bush announced the details Tuesday morning.
"These efforts are designed to directly benefit the American people," Mr. Bush said. He added: "With confidence and determination we will return our econ to the path of growth and prosperity."
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.
Earlier Monday, stocks soared around the world in response to dramatic government economic relief efforts in the U.S. and overseas - and the possibility of the even bolder American action.
Monday night, the Treasury Department said the administration had decided on "comprehensive actions" to bolster public confidence in the nation's financial system. Mr. Bush was to be briefed early Tuesday 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 industry and government officials spoke on condition of anonymity because the details were yet to be formally released.
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 of 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. Mr. Bush will certify on Tuesday that another $100 billion is needed from the $700 billion rescue program. That would leave the final $350 billion to be spent.
This is what the doctor ordered, as far as we can tell.
Paul Krugman
Nobel Laureate, Economics
Paul Krugman, the American academic who was awarded the Nobel Prize in Economics on Monday, told CBS Early Show co-anchor Harry Smith the bank investment "is what the doctor ordered, as far as we can tell."
Economist Lakshman Achuthan agreed that the government's investment in the banks was a necessary move for their survival.
"If the U.S. Treasury, the U.S. Government, is putting the full faith and credit of the United States behind an institution, a company, the company is not going to fail," Achuthan told CBS News correspondent Anthony Mason.
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.
(AP Photo/Evan Vucci)
The administration's proposals were explained during a meeting at the Treasury Department that had been called by Treasury Secretary Henry Paulson and included the top executives of the largest banks in the country. Federal Reserve Chairman Ben Bernanke also participated in the discussions. (In photo, Paulson on Right, Bernanke on left.)
The $700 billion rescue program that Congress passed on Oct. 3 will continue to feature the purchase by the government of banks' bad assets but will now devote a significant part of the effort to direct government purchases of stock in banks, an idea that Paulson brought up only last week.
Despite the optimism and the boost lent to the markets by government investment plans around the world, Mason said traders are wary the huge gains seen this week are also evidence of ongoing volatility, and the worries aren't over yet.
"The truth is that no one is sure it will work," Krugman told The Early Show's Smith. "There's going to be manic depressive markets… There may be moments of depression coming along."
Krugman said the White House's maneuvers, while welcome, were unlikely to stave off the looming economic recession, and, he said; "It looks like a nasty recession… There's a lot of momentum behind it."
Major stock markets around the world surged higher - after plunging ever lower last week - as traders began to hear of Europe's actions and the possibility of further steps in the United States.
"These are tough times for our economies, yet we can be confident that we can work our way through these challenges and America will continue to work closely with the other nations to coordinate our response to this global financial crisis," Mr. Bush said following a meeting with Italian Premier Silvio Berlusconi at the White House.
Over the weekend, Paulson had called the heads of the five biggest U.S. banks to come to Washington for face-to-face talks about the rescue plan, according to people briefed on the matter.
Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, JPMorgan Chase & Co. CEO Jamie Dimon and Bank of America Corp. CEO Kenneth Lewis were all asked to attend.
Democrats in Congress, while supportive of Paulson's desire to expand the program, complained earlier Monday that not enough strings were being attached, such as restricting excessive compensation for Wall Street executives who raked in millions of dollars in bonuses by pursuing risky investment strategies that have now helped push the U.S. financial system to the brink.
The government should purchase only stock in financial firms that agree to cut dividends paid to shareholders, adhere to strict limits on executive compensation and curb their use of exotic investment strategies, said Sen. Charles Schumer, D-N.Y., chairman of the Joint Economic Committee.
"With confidence and determination we will return our economy to the path of growth and prosperity," President George W. Bush said in a statement Oct. 14, 2008. (CBS)
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This is what the doctor ordered, as far as we can tell.
