FED ANNOUNCES PLAN TO PURCHASE EQUITY STAKES IN BANKS AND THRIFTS
The federal government on Tuesday announced the launch of a new program designed to assist with ongoing efforts to help stabilize the U.S. banking system and restore confidence in the country's financial markets, as well as those abroad. So far, nine of the nation's largest banks have agreed to participate in the program, which will allow the government to inject $250 billion into the country's financial institutions in exchange for mandatory preferred stock shares for taxpayers and limited pay for company executives.
The Fed's plan will provide money to banks at a fairly low cost for five years to help unfreeze the nation's credit markets, which have been faltering under bad debt tied to the mortgage lending sector. In announcing the plan, the Fed made it clear: this was not a preferred action, but a necessary one.
"Government owning a stake in any private U.S. company is objectionable to most Americans — me included," said U.S. Treasury Secretary Henry Paulson announcing the plan Tuesday. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable. When financing isn't available, consumers and businesses shrink their spending, which leads to businesses cutting jobs and even closing up shop."
In exchange for funding, the federal government will receive preferred, nonvoting shares in participating banks, which now include, Citigroup, Wells Fargo and Bank of America, with fixed dividends of 5 percent for five years, increasing to 9 percent afterward. In addition, the plan also calls upon lenders to ramp up efforts to stave off foreclosures by working with borrowers to either refinance or restructure loans that will allow them to keep their homes, wherever possible.
"We expect all participating banks to continue and to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure," Paulson said. "Foreclosures not only hurt the families who lose their homes, they hurt neighborhoods, communities and our economy as a whole."