Paulson, Bernanke say plan should unfreeze credit market By Greg Robb & Rex Nutting, MarketWatch WASHINGTON (MarketWatch) -- Treasury Secretary Henry Paulson announced Tuesday that the government would invest $250 billion in banks to encourage them to begin lending again. Paulson said he regretted having to take the actions, but said they are "what we must do to restore confidence to our financial system." Read his complete statement. On Monday, as some details of the plan began to leak out, global stock markets rallied vigorously after a terrifying plunge the week before as bank credits nearly dried up, threatening near-term meltdown and a longer-term global recession. Reaction on Tuesday was also positive. The U.S. stock market opened higher, while Treasury yields rose. Oil prices rose. See full story. The plan to inject capital directly into banks will work to restore confidence, Paulson and Federal Reserve Board Chairman Ben Bernanke said in a joint appearance at the Treasury. "As Americans well know, the challenged evident in the financial markets and in the economy are large and complex, but I believe that the steps taken today will help us overcome them," Bernanke said. Read his complete remarks. Bernanke said that the road ahead would not be easy, but the program "will help to restore confidence to our financial system and place our economy back on a path to vigorous, healthy growth." The heart of the plan is the determination that the government should spend $250 billion to buy temporary ownership stakes in major U.S. banks in an effort to recapitalize the financial sector. Nine banks have already requested government capital, Paulson said. Read more details. The money will come from the $700 billion authorized by Congress. The White House announced that President Bush had signed the letter releasing the money. Congressional reaction was positive as well. "A direct capital injection is the quickest, most direct and safest use of the taxpayers' money to reduce the market turmoil threatening our economy and restore confidence in our markets," said Rep. Spencer Bachus of Alabama, ranking Republican on the House Financial Services Committee. As expected, the detailed plan also includes government insurance on all new bank credits and on non-interest-bearing deposits through the Federal Deposit Insurance Corp. The Fed also announced its program to buy commercial paper will begin on Oct. 27. Read the joint statement. Banks have until Nov. 14 to request capital from the Treasury. The minimum amount for banks is 1% of their risk capital, while the maximum is $25 billion. The government will receive senior non-voting preferred shares and warrants to purchase common shares in return for the capital. The shares will pay a 5% dividend for the first five years and 9% after that, creating an incentive for the banks to buy back the shares from the government as soon as possible. Any bank that receives the government investment must agree to limits on executive compensation and adopt corporate governance rules. The rules require that "incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution." As advertised, details of the Treasury preferred stock were beneficial for existing shareholders. The exercise price on the warrants will be the market price at the time of issuance, calculated on a 20-day trailing average. Banks must not hoard this capital, but must "deploy it," Paulson said. "These efforts are designed to directly benefit the American people by stabilizing our overall financial system and helping our economy recover," Bush said after meeting with Paulson, Bernanke and other top advisers. Bush described the measures as the latest steps to heal markets, leaving the door open for more action.

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