The United States Treasury Department plans to use US$250 billion of the $700 billion financial rescue plan to inject capital into banks by purchasing preferred shares.
Nine large financial institutions have already agreed to participate in the program. Although they weren’t named, it’s expected that Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, State Street, and Wells Fargo are the first participants.
“We regret having to take these actions. Government owning a stake in any private U.S. company is objectionable to most Americans—me included,” said Henry Paulson, the Treasury secretary, in a speech on Tuesday. “Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”
Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes during the period that Treasury holds equity issued through this program.
The shares will pay 5% annually for the first five years and then the payout will rise to 9% annually. The program is designed to encourage banks to buy the shares back from the government when the markets stabilize and they can raise capital from private investors.
Banks have until Nov. 14 to participate in the program.
The U.S. government also announced other steps to help stabilize financial markets: the Federal Deposit Insurance Corporation (FDIC) will temporarily guarantee most new debt issued by insured banks, the FDIC will immediately and temporarily expand government insurance to cover all non-interest bearing transaction accounts, and the Federal Reserve will soon finalize work on a new program to serve as a buyer of last resort for commercial paper.
“We are acting with unprecedented speed taking unprecedented measures that we never thought would be necessary,” he explains. “But they are necessary to get our economy back on an even keel, and secure the confidence and future of our markets, our economy and the economic well-being of all Americans.”