Date: 10/13/08

Bailout Surges Stocks

By MARTIN CRUTSINGER
AP Economics Writer

WASHINGTON (AP) The Bush administration plans to expand protections greatly for the U.S. banking system out of deep concern for the faltering economy, an industry official said Monday night after banking executives and top federal officials met to revamp the largest bailout plan in the nation's history. President George W. Bush was to announce the expansion Tuesday morning.

Stocks soared around the world Monday in response to dramatic government economic rescue efforts in the United States and elsewhere and the possibility of the even bolder American action.

The administration will use perhaps as much as $250 billion of the $700 billion bailout program recently passed by Congress to buy stock in U.S. banks and provide the banks with desperately needed money, the official said. In addition, the Federal Deposit Insurance Corp. will temporarily provide insurance for loans between banks, charging the banks a premium for doing so. That should unlock a vital credit flow that has come under severe stress, putting the health of the U.S. economy in peril.

The official, who spoke with knowledge of the Treasury Department meeting with the bankers on Monday, commented only on condition of anonymity because details of the plan had yet to be released.

This FDIC program would take the form of providing insurance for new senior preferred debt that one bank would lend to another bank. 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 official said the FDIC also was considering the temporary removal of the current $250,000 limit on FDIC insurance on bank deposits. However, it was unclear whether all deposits above this amount would be covered or only certain types. In response to the crisis, Congress as part of the bailout bill temporarily boosted the deposit insurance cap from $100,000 to $250,000.

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.

Scrambling to catch up with events, the new approach by the U.S. government is modeled after many 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.

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 would now devote a significant part of the effort to direct government buys of stock in banks, an idea that Paulson suggested only last week.

Major stock markets around the world surged higher after last week's market disaster as traders began to hear of Europe's actions and the possibility of further steps in the United States.

On Wall Street, a record 936-point increase in the Dow Jones industrials far surpassed the previous one-day mark of 499 points, set in the waning days of the dot-com boom in 2000. But the surge came after the staggering losses of the worst week ever, and economists said more rough days can be expected. European markets rallied after Asia's lead in response to the widespread government initiatives.

"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," Bush said after a meeting with Italian Prime Minister Silvio Berlusconi at the White House.

Over the weekend, Paulson had called the chief executive officers 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 asked to attend, and there was a possibility that CEOs from some major regional banks also would participate.

Democrats in Congress, while supportive of Paulson's desire to expand the program, complained 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 of disaster.

The government should buy stock only 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, Democratic Sen. Charles Schumer, chairman of the Joint Economic Committee, said Monday.

Separately, Republicans and Democrats in the House of Representatives pushed for fresh action to stimulate the faltering economy.

Democrats scheduled hearings to consider a postelection stimulus package that could cost as much as $150 billion. Republicans wanted more tax cuts and energy exploration.

In a campaign speech in Ohio, Democrat Barack Obama proposed a 90-day moratorium on home foreclosures at some banks and a two-year tax break for businesses that create new jobs. Republican John McCain promised a change in direction from the Bush administration's economic policies.

As for the Europeans, governments there said they were putting $2.3 trillion on the line, based on pledges from Britain, Germany, France, Spain, Austria and Portugal in recent days. To help the European banks, the Federal Reserve, the U.S. central bank, announced Monday that it was taking actions to assure enough U.S. dollars were available to meet demand.

"The government cannot just leave people on their own to be buffeted about," said British Prime Minister Gordon Brown.

The $700 billion U.S. bailout bill was passed by Congress on Oct. 3. In the past 10 days, the administration has hurried to get it implemented even as officials have struggled to nail down the broad outlines of how the package will work.

The administration on Monday 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 for buying stock 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.

He said seven policy teams had been set up at Treasury to focus on different aspects of the program while five veteran government officials had been chosen as interim heads of key areas including Tom Bloom, currently the chief financial officer at the Office of the Comptroller of the Currency, to serve as the chief financial officer for the rescue program.

Kashkari said that 70 companies had made bids to become the master custodian firm and that a final selection of the winning firm would be announced by Tuesday. More than 100 companies had submitted bids to become one of the five to 10 firms that will operate the program to buy and manage the bad assets from financial firms. Those selections will follow quickly, Kashkari said.

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AP writers Emily Flynn Vencat in London, Tim Paradis in New York and Julie Hirschfeld Davis and Devlin Barrett in Washington contributed to this report.