US Government to Invest $250 Billion in Banks

The U.S. government will invest about $250 billion in possibly thousands of banks as part of a far-reaching effort to shore up the U.S. financial sector, with the U.S. Treasury unveiling the plans Tuesday, sources have told CNBC.

The planned equity investments are part of a U.S. Treasury, Federal Reserve and Federal Deposit Insurance Corp. program. As part of the deal, the FDIC will insure all non-interest paying bank deposits and new preferred debt issued by banks. The Treasury will provide a three-year guarantee of bank-to-bank lending.

Further, the Bush administration is expected to formally notify Congress that it intends to use the next $100 billion available to it under the $700 billion market rescue plan passed by Congress earlier this month, according to the source.

Treasury Secretary Henry Paulson met with top Wall Street bankers on Monday to nail down the plan for the government to buy shares in financial firms to restore confidence in rattled markets.

The evolving plan marks a quick about-face for Washington policy-makers, who until recent days had been focusing on building an apparatus to soak up bad assets from banks.

Meanwhile, the Wall Street Journal, citing people familiar with the situation, reported late Monday that the federal government plans to buy preferred equity stakes in nine top banks as part of its effort to battle the financial crisis.

The newspaper did not report how much would be invested in each institution, but said the move is designed to destigmatize government investment.

The overall push by the feds could provide faster relief to a paralyzed banking system and would put the United States more in line with Europe, where governments on Monday pledged billions of dollars to recapitalize banks or guarantee lending.

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The blue chip Dow Jones industrial average soared 936 points in its biggest one-day gain ever as investors cheered the moves on both sides of the Atlantic. An announcement of a U.S. plan could come as early as Tuesday.

"There's still a cloud ... over banks, but hopefully this will be the first rays of sunshine," Wayne Abernathy, a policy expert at the American Bankers Association, said of the U.S. Treasury's latest efforts.

Shortly before the 3 p.m. EDT meeting, Goldman Sachs chief Lloyd Blankfield strolled into the U.S. Treasury building with a spiral notebook under one arm. Other Wall Street executives arrived around the same time.

The heads of Bank of America , Citigroup , JPMorgan Chase , Goldman Sachs , Morgan Stanley and New York Mellon were scheduled to attend.

U.S. Federal Reserve Chairman Ben Bernanke and New York Federal Reserve Bank President Timothy Geithner also participated.

The stepped-up effort eased investor angst that the worst financial crisis since the 1930s was going to push the economy through a deep and protracted recession. Last week, world stocks hit five-year lows as sentiment soured, with the Dow recording its worst weekly loss on record.

European Action Shuffles U.S. Plans

A Treasury official said the United States was moving forward on an action plan announced on Friday with other Group of Seven wealthy economies to "improve the availability of funding for our banks."

Britain, Germany, France, Italy and other European governments on Monday announced rescue packages totaling hundreds of billions of dollars aimed at unsticking locked-up global credit markets.

Oliver Quilla for CNBC.com

Early this month, the U.S. Congress gave the Treasury power to buy as much as $700 billion in bad debts to help banks scrub their balance sheets and return to normal lending.

Paulson had previously opposed the idea of Washington buying a stake in banks, which is also permitted under the new law, but officials said they are now retooling the aid package to provide a direct capital injection.

"It's hard to avoid the sense that Mr. Paulson's initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as 'private good, public bad,'" economist Paul Krugman, who won the Nobel price for economics on Monday, wrote in the New York Times.

Key Democratic lawmakers backed the plan as a needed move to quell the crisis.

This "was not the original proposal but clearly there seems to be a consensus that is essentially what is necessary," said House of Representatives Majority Leader Steny Hoyer.

"The economists advise us (that this is) the most beneficial action that can be taken in the short term to stabilize the system," the Maryland Democrat said.

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Speaking before a banking group, the head of the Treasury's $700 billion financial rescue program, Neel Kashkari, disclosed a few details about the plan officials were constructing.

"We are designing a standardized program to purchase equity in a broad array of financial institutions,'' Kashkari told a banking group.

"As with the other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capital,'' he added.

- Reuters contributed to this report.

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