U.S. Will Spend up to $250 Billion on Equity Injections and Debt Guarantees

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The U.S. Treasury will purchase as much as $250 billion in preferred shares of financial institutions, insure all non-interest bearing deposits and guarantee senior bank debt.

The announcement came Tuesday in a joint statement from the Treasury, Federal Reserve and FDIC, in which officials said they are taking "decisive action to protect the U.S. economy."

"These steps will ensure that the U.S. financial system performs its vital role of providing credit to households and businesses and protecting savings and investments in a manner that promotes strong economic growth in the U.S. and around the world," the statement said.

The plan involves buying senior preferred shares that are non-voting and callable after three years. The government will receive warrants to cover any losses, 5% dividends for the first 5 years and 9% dividends afterwards.

The Treasury so far plans to take stakes in nine "major financial institutions" but expects "thousands more." The banks who participate will be subject to executive compensation limits.

"By participating in these programs, these institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending to U.S. consumers and businesses and promoting economic growth. They have also committed to continued aggressive actions to prevent unnecessary foreclosures and preserve homeownership," the statement said.

A second part of the plan involves the FDIC temporarily guaranteeing the senior debt of all insured institutions and their holding companies as well as deposits in all non-interest bearing deposit transaction accounts.

In a separate announcement, the Fed announced it would begin funding purchases of commercial paper on October 27, 2008. The Board authorized the Commercial Paper Funding Facility on Oct. 7 as a way to provide a liquidity backstop to U.S. issuers of commercial paper.

The CPFF, which will finance only highly rated, U.S. dollar-denominated, three-month commercial paper, is intended to improve liquidity in short-term funding markets and thereby increase the availability of credit for businesses and households.

By Adam Button and edited by Stephen Huebl
©CEP News Ltd. 2008