US offers $250bn in capital, markets shrug

The US Treasury announced the $250 billion plan half an hour before equity markets opened and America's leading stock indices soared at the bell. The Dow Jones Industrial Average of shares listed on the New York Stock Exchange rose 354.51 points to 9,742.12 soon after opening. Shares in most leading banks surged and the Nasdaq and the S&P 500 were also up.

But shares soon slumped. Gains in the Dow and the S&P were pared and the Nasdaq slipped into negative territory on fears that housing and retail-sales data out later this week would signal events in financial markets were having a marked impact on the real economy.

The Dow was up by 0.73% by 13:00 local time, the S&P by 0.74%. The Nasdaq was down 1.44%.

The plan is possibly the most ambitious action yet by the authorities in America, with comments by Hank Paulson, the US Treasury Secretary, underlining the extent to which the move would be, in normal circumstances, anathema. "Government owning a stake in any private US company is objectionable to most Americans - me included," Paulson said. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."

The banks can access the $250 billion in exchange for preferred, non-voting stock and restrictions on executive compensation. The restrictions include a clawback provision and a ban on golden parachutes during the period that the Treasury holds shares.

In a further bid to temper public anger, Hank Paulson, the US treasury secretary, said that "taxpayers will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions."

Paulson added that it expected all participating banks to continue and to step up their efforts to help struggling homeowners who can afford their homes avoid foreclosure.

Nine of the biggest banks have already agreed to participate. Paulson said the nine were "healthy institutions" that were involved "for the good of the US economy." The nine are thought to be Morgan Stanley, Merrill Lynch, Goldman Sachs, Bank of America, Citigroup, Wells Fargo, Bank of New York Mellon Corp, State Street and JPMorgan.

The injection, to be financed from the $700 billion financial rescue package, will be coupled with other measures announced in unison by the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), which manages America's deposit insurance fund.

The FDIC will temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts.

The Fed will begin lending through its Commercial Paper Funding Facility program, on 27 October, accepting commercial paper of three-month maturity from high-quality issuers.

"These three steps significantly strengthen the capital position and funding ability of US financial institutions, enabling them to perform their role of underpinning overall economic growth," the authorities said. "The actions are a powerful step toward restoring the health of the global financial system."

About-turn

The $250 billion injection represents an about-turn for the architects of the plan: Paulson and Ben Bernanke, the chairman of the Federal Reserve. Both had been keen to spend the $700 billion rescue package on financing purchases of distressed assets.

But Tuesday's move was expected with Paulson acknowledging late last week that capital injections would be required. Jim Lockhart, a senior US regulator, revealed on Monday that the Treasury would spend a very significant amount of the $700 billion on equity injections and that would swap preferred, rather than common, stock for funds.

Click here to read Paulson's statement

Click here to read the joint statement