US to buy €183.3 billion in bank stakes

The US ushered in a new era in banking yesterday with plans to take equity stakes worth up to €183.3 billion in financial institutions, an incursion into the private sector that US officials called a regrettable last resort.

The US government followed European powers that agreed to recapitalise their banks a day earlier, triggering a global stock market rebound that continued yesterday when Wall Street rallied four per cent at the open before falling back.

Moreover, relief was evident in money markets with interbank costs for overnight rates falling for the second day in a row, a sign that lending may be picking up. "This is an essential short-term measure to ensure the viability of America’s banking system," US President George W. Bush said in a televised address.

"These measures are not intended to take over the free market but to preserve it," Mr Bush said.

The US Treasury will buy nonvoting preferred shares in major financial institutions, with stakes in each limited to €18.3 billion. Bank executives must accept limits on their pay, and standards of corporate governance.

US Treasury Secretary Henry Paulson said nine banks that he described as "healthy institutions" had agreed to accept government stakes for the good of the US economy – a government intervention unthinkable before the credit crisis, the worst since the 1930s Great Depression.

"Government owning a stake in any private US company is objectionable to most Americans, me included," Mr Paulson said. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."

Mr Bush said the Federal Deposit Insurance Corporation would guarantee new bank debt, temporarily insure senior preferred debt issued by banks and thrifts, and that the Federal Reserve would become a buyer of last resort of commercial paper – the debt instruments companies use to fund activity.

The US measures are intended to stimulate interbank lending and the commercial paper markets, whose stagnation may have already pushed the US economy into recession. Former US Federal Reserve Chairman Paul Volcker said the world’s biggest economy was already in recession.

On Monday, Britain, Germany, France and others pledged more than €1 trillion in direct capital injections for banks and to underwrite lending between banks that has all but frozen, choking off funds that drive business and industry.

Japan joined the global push, saying it could inject public funds into regional banks to make sure small firms can get cash.

The chief executive officer of one of the world’s biggest private equity firms said yesterday the injection of government cash into US banks, alongside similar measures around the world, could break the back of the credit crisis.