The US government has cleared the way to ship out US$125 billion this week to the country’s largest banks, beginning the biggest government bailout in history.
“The money will go out the door for those institutions early this week,” said Assistant Treasury Secretary David Nason, one of the chief architects of the rescue plan.
Not only is the money ready to be sent to nine major financial institutions, including Bank of America, Citigroup Inc and JPMorgan Chase, but the government is reaching preliminary agreements with a group of more than a dozen major regional banks that will share a part of an additional US$125 billion the government hopes to pump into the banking system.
Before the end of the year, Treasury Secretary Henry Paulson intends to have spent US$250 billion of the US$700 billion bailout package buying ownership stakes in US banks. The goal is to improve their balance sheets so that they will resume more normal lending practices and prevent the country from sliding into a deep recession.
Another US$100 billion is earmarked to be spent buying troubled assets from banks — such as bad mortgage loans — as another way to spur banks to resume lending.
However, a long line of other industries is hoping the government will decide to help them as well. Insurance companies, automakers, hedge funds and foreign-owned banks are all making appeals to be included in the rescue package, contending that they need assistance as well.
Treasury and White House officials signaled on Monday that their cases were being reviewed. That review is coming in the closing days of a heated election campaign when the country will be electing a new president and a new Congress for next year.
The Federal Reserve began a program on Monday to purchase the short-term debt of businesses, known as commercial paper.
This market has been frozen since the collapse of Lehman Brothers spooked credit markets last month.
Fed officials were also scheduled to begin a two-day meeting on interest rates yesterday, with economists widely forecasting that the Fed will cut a key interest, the federal funds rate, to 1 percent in an effort to boost borrowing demand as a way to deal with the economy’s current troubles.
So far, the efforts to battle the severe credit squeeze have shown few results. Libor, the London Interbank Offered Rate, a key goalpost for international lending, edged down only marginally on Monday and still remains at elevated levels.
“All these efforts are doing some good, but the question is whether they will do enough,” said David Wyss, chief economist for Standard & Poor’s in New York. “The credit markets are still pretty locked up.”
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