Treasury Rolls Out $250 Billion Capital Purchase Plan

The Treasury Department announced Tuesday its detailed plan to purchase equity stakes in banks across the country, essentially nationalizing a portion of the banking sector. The Dow Jones Industrial Average (INDU) rose more than 400 points in the first hour of trading in response to the announcement but then slid down by late morning. President George W. Bush spoke earlier Tuesday on the “essential short-term” plan to inject capital into banks by purchasing equity shares. “This new capital will help healthy banks continue making loans to businesses and consumers,” he said. “And this new capital will help struggling banks fill the hole created by losses during the financial crisis, so they can resume lending and help spur job creation and economic growth.” The program encourages banks to buy the shares back from the government after markets stabilize, Bush said. Within moments of Bush’s announcement, the Treasury released multiple media statements addressing the plan to buy $250 billion in equity stakes from “a wide array of banks and thrifts.” Although government ownership in private companies is “objectionable,” Treasury secretary Henry Paulson in a statement called the alternative — denying financing to consumers and businesses — “totally unacceptable.” “When financing isn’t available, consumers and businesses shrink their spending, which leads to businesses cutting jobs and even closing up shop,” he said. “To avoid that outcome, we must restore confidence in our financial system.” The “effort to restore confidence” has been ongoing for months now, and the the Treasury’s plan to buy $250 billion in preferred stock from key financial institutions is just the latest attempt by government and regulators to head off a credit crisis that many now believe has the U.S. headed for a deep recession. The program draws its funding from the $700 billion financial rescue package passed a few short weeks ago, and requires institutions that participate to accept steep 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.” “In addition, 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 said. “We expect all participating banks to continue and to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure.” The Treasury said its goal is to encourage healthy financial institutions to not only sell preferred shares, but raise additional private capital, he said. This in turn should lead financial institutions to deploy new capital in the form of loans to businesses and individuals, rather than “hoard” it. “Nine large financial institutions have already agreed … to sell preferred shares to the US government on the same terms that will be available to a broad array of small and medium-sized banks and thrifts across the nation,” Paulson said. “These are healthy institutions, and they have taken this step for the good of the U.S. economy. As these healthy institutions increase their capital base, they will be able to increase their funding to U.S. consumers and businesses.” The Treasury announced the development of three programs Tuesday including the capital purchase plan. The Treasury said it will announce guidelines for another program, the troubled asset auction program, in coming weeks. Firms that participate in this plan are also subject to the executive compensation regulations. Among the requirements is a stipulation that any financial institution that sells more than $300 million of troubled assets to the Treasury may not enter into new executive employment contracts with golden parachutes. Participating financial institutions are limited in tax deductions for senior executive compensation and restricted from deducting certain golden parachute payments to senior executives. A 20 percent excise tax will also be imposed on senior executives who enjoy these golden parachute payments, the Treasury said in a press statment. The last program announced Tuesday, which the Treasury said it is still developing, will potentially provide direct assistance to failing institutions negotiated on a case-by-case basis. Editor’s Note: To contact the reporter on this story, email [email protected].