Paulson said the government plans to use more than a third of the $700 billion bailout funds to purchase bank shares. Banks that participate would need to accept restrictions on executive compensation. He said taxpayers would own shares that should be paid back with a reasonable return and will receive warrants for common shares.
"Our goal is to see a wide array of healthy institutions sell preferred shares to the treasury, and raise additional private capital, so that they can make more loans," Paulson said.
Paulson acknowledged that government ownership in companies is viewed as objectionable. But leaving businesses and consumers without access to financing would lead to business failures and job losses. He said the crisis has made investors unwilling to lend to banks and healthy banks unwilling to lend to each other as well as consumers and businesses.
Other steps announced yesterday include allowing the FDIC to temporarily guarantee new issues of bank debt - fully protecting the money even if the institution fails. And, the FDIC will start providing unlimited deposit insurance for non-interest bearing accounts, which are mainly used by businesses to cover payrolls and other expenses.
The preferred stock purchase program "puts new capital into the banks at a relatively low cost," said Gary Townsend, a former bank regulator and bank analyst and now president and chief executive of Hill-Townsend Capital LLC in Chevy Chase.
During the past couple of weeks, regional banks and credit unions have stepped up efforts to reassure jittery customers that their money is safe and federally insured. Many companies are using advertising, letters to customers and other campaigns to get their messages out.
Northwest Saving Bank, which has five branches in the Baltimore area, began using print advertisements last week saying the company "continues to be a financially strong, safe haven for your hard-earned FDIC-insured dollars."
Jim Holding, a vice president of marketing for Northwest, said the bank launched the campaign because "People are worried, despite the fact that FDIC insurance is up to more than double. We're trying to tell them the FDIC is not their first line of defense; the bank is the first line of defense."
The Associated Press contributed to this article
THE PLAN
