WASHINGTON — The federal government will buy stock in American banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said Friday in the latest dramatic effort to reverse a global financial panic.
“This is a period like none of us has ever seen before,” declared Paulson at a rare Friday evening news conference. He said the government program to buy stock in private U.S. financial firms will be open to a broad array of institutions, including banks, in an effort to help them raise desperately needed cash.
The administration received the authority to take such direct action in the $700 billion economic rescue bill that Congress passed and President Bush signed last week.
Paulson announced the move at the conclusion of discussions among finance officials of the Group of Seven major industrialized countries. The so-called G-7 pledged to take “decisive action and use all available tools” to prevent a worldwide economic catastrophe.
The latest actions came at the end of a dispiriting week that was the worst ever for major U.S. stock indices including the Dow Jones industrials and the Standard & Poor's 500. Stock prices also suffered heavy losses in Europe, Asia and elsewhere.
A sign of how bad things have gotten: A drop of 128 points in the Dow Friday was greeted with sighs of relief after the index had plummeted much further earlier in the session.
The latest Paulson plan follows Britain's move earlier in the the week to partially nationalize its troubled banks by pouring cash into them in return for equity stakes.
Paulson said the U.S. program would be designed to complement banks’ own efforts to raise fresh capital from private sources. The government’s stock purchases will be of nonvoting shares, so it will not have power to run the companies.
The back-stock program would be in addition to the main thrust of the $700 billion rescue effort, which is to purchase distressed assets from financial institutions as a way of unthawing frozen credit, getting banks to resume more normal lending operations and staving off severe problems for businesses and everyday Americans.
Paulson and Federal Reserve Chairman Ben Bernanke met with their counterparts from the world’s six other richest countries late in the day as the rout of financial markets continued.
In a statement at the end of that meeting, the G7 officials vowed to protect major banks and to prevent their failure. They also committed to efforts to get credit flowing more freely again, support the efforts of banks to raise money from both public and private sources, bolster deposit insurance and revive the battered mortgage financing market.
They did not provide specifics beyond that five-point framework.
At the White House earlier in the day, President Bush said, “We’re in this together and we’ll come through this together.” He added, “Anxiety can feed anxiety, and that can make it hard to see all that’s being done to solve the problem.”
He made it clear the United States must work with other countries to battle the worst financial crisis that has jolted the world economy in more than a half-century.
“We’ve seen that problems in the financial system are not isolated to the United States,” he said. “So we’re working closely with partners around the world to ensure that our actions are coordinated and effective.”
The Dow dropped a little over 100 points while he was speaking.
Fear has tightened its grip on investors worldwide even as the United States and other countries have taken a series of radical actions including an unprecedented, coordinated interest rate cuts by the Federal Reserve and other major central banks.
Besides the United States, the other members of the G7 meeting in Washington are Japan, Germany, Britain, France, Italy and Canada. Finance officials also planned to meet with Bush Saturday at the White House.
“We are in a development where the downward spiral is picking up speed,” said Germany’s Finance Minister Peer Steinbrueck, who wanted to see an orchestrated response among the G7.
So did French Finance Minister Christine Lagarde, who said a “coordinated, synchronized and rightly timed approach” was needed.
An even larger group of nations — called the G20 — will meet with Paulson on Saturday evening.
How the world’s finance officials and central bank presidents can better contain the spreading financial crisis also will dominate discussions at the weekend meetings of the 185-nation International Monetary Fund and the World Bank in Washington.
The British, who recently announced a plan to guarantee billions of dollar worth of debt held by major banks, have been pitching that idea to the rest of the G7 members.
The idea behind all these ideas — as well as bold steps previously announced in recent weeks — is to get credit flowing more freely again.
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