Bailout action starts

Following in the footsteps of the British government, (Q&A here, and analysis here) the US and many European governments have announced their bailout plans. All the plans broadly seek to recapitalize the banks by capital infusion in exchange for equity stakes, extend some form of guarantees for deposits and on inter-bank lending, and impose restrictions on executive compensation on the firms availing the assistance. The American plan is more liberal in terms of the conditions imposed on the firms participating in the program.

Under the US plan, the Treasury would make $250 billion available to banks — nine have already been identified — in order to help recapitalize those banks and to get them lending again, among themselves and to businesses and consumers, besides guaranteeing new debt issued by banks for three years. The Federal Deposit Insurance Corporation (FDIC) would also offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees. And the Federal Reserve would start a program to become the buyer of last resort for commercial paper, a move intended to help businesses get the money they need for day-to-day operations and act as a back stop for a $1.6 trillion market.

Of the $250 billion, which will come from the $700 billion bailout approved by Congress, half is to be injected into nine big banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase, officials said. The other half is to go to smaller banks and thrifts. The investments will be structured so that the government can benefit from a rebound in the banks’ fortunes. All these investments and guarantees would be for a period of three years, thereby fixing an exit time for the government commitments. An analysis of the plan is found here.

These interventions to prop up banks large and small — along with recent bailouts as well as guarantees to support business loans, money markets and bank lending — mark a dramatic change in the global financial landscape and makes the national governments the ultimate guarantor for banks, something unimaginable till a few weeks back. The markets have so far responded positively to these interventions, with share prices rising across the world.

British bailout plan



US bailout plan




Update 1
Reactions of economists to the new plan here.

Update 2
Gretchen Morgenson feels that the restrictions imposed on executive pay in the bailout plan are important since the nine banks participating in the capital infusion program paid their former and current chief executives a total of $231 million last year.

Update 3
Here is an article on how the Europeans were swifter off the mark in responding to the financial market crisis.