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$250 Billion Package

By: ratetake

First package to unclog financial markets was announced by President Bush on Tuesday saying the drastic steps were "not intended to take over the free market but to preserve it."

Nine major banks will participate initially in this plan. Federal Reserve Chairman Ben Bernanke said a U.S. financial rescue plan would restore normality to markets. Although the government had acted quickly, most banks were still solvent and able to lend, Bernanke wrote.

Although the government had acted quickly, most banks were still solvent and able to lend, Bernanke wrote.

The latest plan calls for a recapitalization of banks, federal guarantees on new bank debt for three years and FDIC insurance for non-interest bearing accounts. The $250 billion will come from a $700 billion financial bailout program that was originally approved by Congress. Financial firms that will use the money would have to accept compensations on limits for executives

Government Plan:

- US Treasury will buy up to $250 billion in preferred, nonvoting shares.

- Maximum purchase will be $25 billion per institution.

- Preferred shares to pay 5 percent a year for first 5 years, 9 percent after 5 years.

- Firms in program must adopt Treasury's standards on executive pay and corporate governance.

FDIC Plan:

- FDIC will guarantee senior unsecured debt issued by U.S-regulated banks, thrifts and other depository institutions issued before June 30, 2009

- Debt would be fully protected in the event that the issuing institution subsequently fails, or its holding company files for bankruptcy.

- Fees for these guarantees would not rely on taxpayer funding. They would be paid by participating banks that would pay a 75 basis-point fee to protect their new debt issues and a 10 basis-point surcharge for deposits not otherwise covered by the existing deposit insurance limit of $250,000.

Some of the nations banks had to be pressured to take part in $250 billion package. Secretary Paulson wanted first healthy financial institutions. "We regret having to take these actions," Paulson said. "Today's actions are not what we ever wanted to do — but today's actions are what we must do to restore confidence to our financial system."

Under the new program government will buy stocks in nine major banks. When financial markets stabilize and recover, the banks are expected to buy back stocks from the government.

Federal Reserve announced that it would be buying short term debt starting Oct.27. The administration plan is to spend $250 billion on stock purchase plan and additional $100 billion for covering bad assets. That would leave $350 billion out of $700 billion that should be spent by next president. Government expects to spend all $250 billion by the end of the year.

However, skepticism remains how effective this program will be. Some banks may simply say "No Thanks" as some banks had to be pressured to take part of this package. Right now it may solve confidence in the market as government is doing something, but still mortgage market is not fixed.

So far no one knows what will work as blank checks are given to Treasury; however the latest measures taken by government might be the beginning of the solution.

Article Source: http://articleaddict.com

Susan Duey represents RateTake Mortgage Loan marketplace. RateTake matches consumers with multiple lenders offering low mortgage rate quotes. RateTake also operates Debt Relief resource center.

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