Bush Details $250B Bank Investment Plan

"The government's role will be limited and temporary," Bush said in morning remarks at the White House. "These measures are not intended to take over the free market, but to preserve it." (Photo: AP)

President George Bush said this morning that the administration's "unprecedented and aggressive" plan to partly nationalize nine major banks was an "essential short term measure to ensure the viability " of a battered financial system.

With the government poised to invest $250 billion of taxpayer's money into private banks, Bush said that the plan was not an abandonment of the free market, but a necessary move to avoid a deep economic crash.

"The government's role will be limited and temporary," Bush said in morning remarks at the White House. "These measures are not intended to take over the free market, but to preserve it."

Top economic policymakers, including Treasury Secretary Henry M. Paulson Jr., are set to unveil further details of the plan in briefings this morning. But the broad outlines were released on Monday. The U.S. followed similar steps announced through the day in Europe in what amounted to a coordinated move by the world's major economies to back the global banking system with public funds and confidence-building measures, such as government guarantees of loans between banks.

Bush said this morning that while the new programs might seem "distant" to the lives of everyday people, they will directly affect the ability of small businesses to obtain operating cash, and households to finance auto, home and other major purchases.

The government investment will "help healthy banks continue making loans and this new capital will help struggling banks fill the hole created by losses in the financial crisis," Bush said.

The government's $250 billion direct investment into banks in essence forces nine of the largest to accept what amounts to a partial nationalization.

News that European governments also planned to take stakes in their banks and anticipation of new U.S. measures unleashed a tremendous surge in U.S. stock prices yesterday, with the Dow Jones industrial average soaring to the biggest percentage gain since the 1930s, up 11.1 percent. It ended 936.42 points higher, the largest point gain ever, just days after the Dow had its steepest weekly decline in history.

The rally continued today on Asian and European exchanges. In addition, some key measures of the crisis -- such as the interest rates banks charge each other for short term loans -- began to ease.

The Treasury Department's decision to take equity stakes in banks represents a significant reversal, coming just weeks after Paulson had opposed the idea. In a momentous meeting yesterday afternoon in Washington, Paulson, flanked by top financial regulators, told the executives of nine leading banks that they needed to participate in the program for the good of the national economy, two industry sources said on condition of anonymity because they were not authorized to speak publicly.

The government's initiative, which was to be announced this morning before the markets open for New York trading, is part of a wider plan that goes beyond the $700 billion rescue package approved by Congress earlier this month. The Federal Deposit Insurance Corp. is also set to announce today the launch of an insurance fund to guarantee new issues of bank debt. It will provide unlimited deposit insurance for non-interest-bearing accounts, which are widely used by small businesses for payroll and other purposes.

In pressing the bank executives to accept partial government ownership, Paulson's message was clear: Though officially the program was voluntary, the banks had little choice in the matter. In exchange for giving the Treasury minority stakes, the nine firms would jointly receive an investment worth $125 billion. The government would make another $125 billion available for the next 30 days to thousands of other banks and thrifts across the country.