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U.S. To Spend $250B On Stake In Banks

MELISSA BLOCK, host:

From NPR News, this is All Things Considered. I'm Melissa Block. We begin this hour with the Bush administration's plan to inject $250 billion into the nation's banking system. President Bush announced the plan this morning in the Rose Garden.

President GEORGE W. BUSH: This is an essential short-term measure to ensure the viability of America's banking system. And the program is carefully designed to encourage banks to buy these shares back from the government when the markets stabilize and they can raise capital from private investors.

BLOCK: The president said these measures are not intended to take over the free market, but to preserve it. In a moment, we'll explore the question of whether this is a nationalization of the banks. NPR's John Ydstie gets us started with more details of the president's plan.

JOHN YDSTIE: The plan, which in addition to stock purchases also provides FDIC insurance on interbank lending, was unveiled in the Treasury's ornate Cash Room. As Treasury Secretary Henry Paulson stepped to the podium flanked by other top government financial officials, he made clear his distaste for the action the government was about to take.

Secretary HENRY PAULSON (Treasury Department): Today, I'm announcing that the Treasury will purchase equity stakes in a wide variety of banks and thrifts. Government owning a stake in any private U.S. company is objectionable to most Americans, me included. Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.

YDSTIE: The Treasury says it will spend $250 billion of the $700 billion from the congressional rescue package on senior bank shares by the end of the year. The administration says the program will be voluntary. Banks can choose whether or not to participate. However, during meetings with nine of the nation's biggest banks yesterday, Treasury officials reportedly pressured senior executives of some banks who were reluctant to participate. While the administration suggests the government will be a passive investor, it will exercise controls over executive compensation and over dividends.

The administration had been considering limited capital injections into banks for the past week or so, but massive action by European governments to prop up their banks appeared to influence the size and speed of the U.S. action. FDIC Chairwoman Sheila Bair confirmed the pressures in her remarks.

Ms. SHEILA BAIR (Chairman, FDIC): Our efforts also parallel those of the international community. Their guarantees for bank debt and increases in deposit insurance would put U.S. banks on an uneven playing field unless we acted as we are today.

YDSTIE: Among the actions announced today, the FDIC will provide unlimited guarantees on non-interest-bearing accounts like those used by businesses to make payroll. The other FDIC initiative to guarantee senior bank debt, including lending between banks, should help unfreeze that market which has been at the core of the credit problems. Robert Litan, a banking specialist at the Brookings Institution, says the program is a step in the right direction...

Dr. ROBERT LITAN (Senior Fellow, Brookings Institution): By just simply reducing the level of mistrust in the interbank lending market does not mean that banks are going to suddenly turn on the spigot and start making consumer loans and business loans with the same vigor they were doing before. For that to happen, the economy has got to recover. And right now, the economy is still falling. How far and how fast, we won't know until some of the numbers come in.

YDSTIE: Despite some reluctance from bank officials yesterday, Scott Talbott of the Financial Services Roundtable says the industry now backs the program.

Mr. SCOTT TALBOTT (Senior Vice President for Government Affairs, Financial Services Roundtable): In the end, our executives are supportive of the program. They recognize that we are in extraordinary circumstances, and we are captains of industry. And their role in the markets is one to help restore confidence as well as continued liquidity.

YDSTIE: The financial markets were relatively calm today, suggesting investors saw the government's action as positive. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

John Ydstie has covered the economy, Wall Street, and the Federal Reserve at NPR for nearly three decades. Over the years, NPR has also employed Ydstie's reporting skills to cover major stories like the aftermath of Sept. 11, Hurricane Katrina, the Jack Abramoff lobbying scandal, and the implementation of the Affordable Care Act. He was a lead reporter in NPR's coverage of the global financial crisis and the Great Recession, as well as the network's coverage of President Trump's economic policies. Ydstie has also been a guest host on the NPR news programs Morning Edition, All Things Considered, and Weekend Edition. Ydstie stepped back from full-time reporting in late 2018, but plans to continue to contribute to NPR through part-time assignments and work on special projects.