U.S. To Directly Invest $250 Billion In Banks
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Following meetings this afternoon with key financial firms, the U.S. Treasury is expected to announce plans to directly invest up to $250 billion in various banks and financial institutions in an effort to bolster the struggling banking system and stimulate lending.
According to reports from the Wall Street Journal and New York Times, the U.S. government will buy preferred equity stakes in a number of leading banking institutions. Citigroup (NYSE: C) and JP Morgan (NYSE: JPM) are expected to get $25 billion each, Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) will get $20 billion each, Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) are expected to get $10 billion each, and Bank of New York Mellon (NYSE: BK) and State Street (NYSE: STT) will get between $2-$3 billion each.
The funds the Treasury will use for the capital injections will come from the $700 billion Troubled Assets Relief Program already approved by Congress. The focus of the original U.S. plan was to buy the troubled assets of the banks, but the speed of the deterioration in the credit markets and a capital injection plan already put in action in the U.K. has placed the U.S. focus on this more immediate solution.
In addition to the capital injections, the FDIC plans to temporarily guarantee new debt issued by banks for three years. This is intended to encourage banks to start lending to each other again and, if successful, will bring down key lending rates like LIBOR.
The FDIC will also offer unlimited deposit guarantees on non-interest bearing bank accounts, which are typically used by businesses.
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