The $700 Billion Bailout Plan (Take Two)

The Fed unveils new details about its sweeping intervention into the financial markets.


When the controversial $700 billion bailout plan made its awkward spin through Congress, Treasury officials focused mainly on its authority to allow the government to buy up vast quantities of mortgage and other assets that were gumming up the credit markets.

But Tuesday, the Feds issued details on an amended bailout plan, which includes making equity investments in U.S. banks and guaranteeing bank debt. The changes come after European officials undertook similar measures last week.

As a result, the largest financial bailout since the Great Depression now has three distinct components:

1. Direct Equity Investments: The government will buy up to $250 billion of nonvoting, senior-preferred shares in U.S. banks. The shares will pay an annual dividend rate of 5 percent for the first five years and 9 percent thereafter. "Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes during the period that Treasury holds equity issued through this program," Treasury Secretary Henry Paulson said in a statement.

The goal here is to ensure that banks have enough capital to start lending again. Bloomberg reported on Tuesday that "nine companies will get $125 billion: Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, State Street Corp., and Bank of New York Mellon Corp."

2. Bank Debt Guarantee: At the same time, the Federal Deposit Insurance Corp. will begin guaranteeing the senior debt of U.S. banks. The measure is designed to ensure that banks have access to the short-term lending they need to operate smoothly. In the aftermath of the bankruptcy of Lehman Brothers, interbank lending has frozen up.

3. Troubled Asset Purchases: The previously announced initiative to purchase troubled assets from banks isn't scrapped but will instead be used in tandem with the measures listed above. Under this program, the government will buy distressed, hard-to-value assets from banks and sell them to private investors at a later date. The measure is designed to relieve banks of the assets that have been rotting on their balance sheets since the credit crisis hit last summer.