For the first time since the Great Depression, the U.S. government will buy an ownership stake in a broad array of American banks.
"This is a period like none of us has ever seen before," Treasury Secretary Henry Paulson said as he made the announcement at a rare Friday night news conference, hours after stock markets fell around the world despite all efforts to slow the selling stampede.
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.
The administration received the authority to take such direct action in the $700-billion US economic rescue bill that Congress passed and President George W. Bush signed Oct. 3.
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.
Paulson said the U.S. program would be designed to complement efforts by the banks to raise fresh capital from private sources. The government's stock purchases will be of non-voting shares so it will not have power to run the companies.
The purchase of stakes in companies would be in addition to the main thrust of the $700-billion rescue effort, which is to purchase distressed assets from financial institutions as a way of unthawing frozen credit, getting banks to resume more normal lending operations and staving off severe problems for businesses and everyday Americans alike.
First since the Depression
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.
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, co-ordinated interest rate cuts by the Federal Reserve and other major central banks.
Earlier this week, Britain had moved to pour cash into its troubled banks in exchange for stakes in them — a partial nationalization.
In the United States, hard-pressed banks and investment firms are drawing emergency loans from the Federal Reserve because they can't get money elsewhere. Skittish investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers.
The lending lockup — which is making it harder and more expensive for businesses and ordinary people to borrow money — is threatening to push the United States and the world economy as a whole into a deep and painful recession.
The Fed has repeatedly tapped its Depression-era authority to be a lender of last resort, not only to financial institutions but also to other types of companies. Earlier this week, the Fed said it would buy massive amounts of company debts in another unprecedented effort to break through the credit clog.