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US plans $250 bn injection for banks

Wall Street has soared again with the US Govt outlining several steps to combat the financial crisis, including a likely $250 billion injection to help struggling banks.

business Updated: Oct 14, 2008 10:14 IST
Arun Kumar

Rebounding from its worst week in history, Wall Street has soared again with the US government outlining several steps to combat the financial crisis, including a likely $250 billion injection to help struggling banks.

Monday's massive rally saw the Dow Jones industrial average propelled to its largest daily point gain ever and the largest percentage increase since the depths of the Depression. Standard & Poor's 500-stock index too posted its best gain in nearly 70 years.

The Dow closed up 11 percent, or 936 points. It was the Dow's largest single-day point gain, far surpassing the jump of 499 points on March 16, 2000. Only four other days - all during the late 1920s and early 1930s - have seen larger percentage gains for the Dow.

The S&P was up 11.6 percent, or 104 points, in its best one-day gain since 1939. The tech-heavy Nasdaq was up 11.8 percent, or 195 points.

Stocks snapped an eight-day losing streak fuelled by deepening concerns of a global recession. The Dow and S&P both lost 18 percent of their value last week, the worst week in Wall Street history.

The Treasury Department, in its boldest move yet, is expected to announce a plan Tuesday to invest up to $250 billion in large and small banks, media reports said. The US is also expected to guarantee new debt issued by banks for a period of three years.

The Federal Deposit Insurance Corporation too will offer an unlimited guarantee on bank deposits in accounts that do not bear interest - typically those of businesses - bringing the US in line with several European countries, which have adopted such blanket guarantees.

The country's central bank, Federal Reserve said it would make billions of dollars available to banks via swap lines with the Bank of England, the European Central Bank and the Swiss National Bank.

Treasury Secretary Henry M Paulson outlined the plan Monday to nine of the nation's leading bankers telling them that they would have to accept government investment for the good of the American financial system. The goal is to inject massive liquidity into the banking system.

The capital injections are not voluntary, with Paulson making it clear this was a one-time offer that everyone at the meeting should accept, the New York Times said. The participants included Citibank's Indian American chief Vikram S. Pandit.

Among other moves meant to restore confidence, Neel T. Kashkari, an Indian American official charged with implementing the government's $700 billion financial rescue plan, outlined details of the programme and said appointments would be announced soon.

"A programme as large and complex as this would normally take months - or even years -to establish," said Kashkari, interim assistant treasury secretary for financial stability in a speech to the Institute of International Bankers. "We don't have months or years."

"We are designing a standardised programme to purchase equity in a broad array of financial institutions," he said. "The equity purchase programme will be voluntary and designed with attractive terms to encourage participation from healthy institutions."

Kashkari said the administration has set up several programmes needed to put the bailout plan into action, but did not say when they will start buying troubled assets or how much they will spend.