In full: Hank Paulson statement on banks rescue

The US Government is to spend up to $250 billion buying direct stakes in banks and other financial institutions under a controversial emergency plan which President Bush insisted today was "not intended to take over the free market but to preserve it".

In a rescue scheme modelled on that announced for British banks by Gordon Brown last week, the partial nationalisation of companies such as Wells Fargo or JP Morgan Chase will be accompanied by a package to unblock the credit logjam paralying the system.

It is a painful move in a country that prides itself on being the home of market capitalism - as Mr Bush's Treasury Secretary, the former Wall Street CEO Hank Paulson, was the first to admit.

"Government owning a stake in any private US company is objectionable to most Americans, me included," Mr Paulson said today.

"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."

The $250 billion (£142 billion) will come from a $700 billion bailout package already agreed by Congress after negotiations led by Mr Paulson.

The initial plan for the bailout had been for the money to be used to purchase "toxic" sub-prime mortgage debt from lenders to allow them to clear up their balance sheets, but it quickly became apparent that that would not necessarily help ease the credit crunch.

Instead, the United States will follow the path already taken in Europe and combine a partial renationalisation of nine banks with a package of loan guarantees.

Under details released by the Treasury Department, the Government will buy non-voting preferred shares in the qualifying financial institutions, with stakes in each institution limited to $25 billion or 3 per cent of risk-weighted assets. It set a November 14 deadline for banks to apply for government purchases.

In addition, Mr Paulson said, nine banks he described as "healthy institutions" had agreed to accept government stakes "for the good of the US economy". Those include such names as JP Morgan Chase, the nation's largest bank by deposits and market capitalisation, Wells Fargo, Bank of America and Morgan Stanley.

"We regret having to take these actions. Today’s actions are not what we ever wanted to do, but today’s actions are what we must do to restore confidence to our financial system," Mr Paulson told a news conference.

The US action follows European governments, including Britain and Germany, which announced steps to inject capital directly into banks yesterday.

Financial firms that turn to the government under the program will have to accept limits on executive compensation, including forfeiting tax deductibility for compensation above $500,000 for top executives. The preferred shares also will pay cumulative annual dividend rate of 5 per cent for the first five years and 9 per cent after that, the Treasury said.

In addition, the Federal Deposit Insurance Corp said it would try to unlock interbank lending by guaranteeing 100 per cent of the senior unsecured debt of banks and other depository institutions.

It also will guarantee all deposits held in non-interest-bearing transaction accounts, as used by small businesses, until the end of 2009. At the moment such deposits are covered only up to $250,000, so many businesses have been forced to operate multiple accounts to protect their funds.

"The overwhelming majority of banks are strong, safe and sound," the FDIC Chairman Sheila Bair said."A lack of confidence is driving the current turmoil and it is this lack of confidence that these guarantees are designed to address."

The guarantees will be funded by a 75 basis-point fee paid by banks to protect their new debt issues as well as an added surcharge on top of their regular FDIC deposit insurance fees.

Times Recommends

• 'New York has lost its edge'
• Copenhagen will fail – and quite right too
• More than 17,000 new underwater species found