WASHINGTON — In a major strategic shift, the Bush administration has decided to pour at least $250 billion directly into major banks and expand federal insurance protection to encourage financial institutions to resume lending to one another.
Stocks soared on hopes that policymakers had finally hit on the right formula to thaw the frozen credit system and quell the financial calamity that has hammered giant banks and small investors alike. The Dow Jones industrial average rocketed more than 900 points, its biggest one-day point gain ever.
"The history of banking crises suggests very strongly that you need heavy government involvement. Half measures don't work," said Nariman Behravesh, chief economist at forecasting firm Global Insight. "This is a good thing. It's about time."
Scheduled to be rolled out early today by President Bush, the strategy closely resembles the path taken by Britain and the European Union, a route credited with reviving faltering stock markets there.
Under the new approach, which can be implemented under the $700-billion rescue plan approved by Congress this month, the federal government intends to pump capital into nine major banks and financial firms that agreed to participate during meetings with Treasury Secretary Henry M. Paulson on Monday.
In return, it's expected the government would receive preferred nonvoting shares of their stock. Additional banks are expected to participate as the program moves forward, according to a person with knowledge of the plan who was not authorized to speak publicly.
In addition to helping recapitalize banks, the administration will also try to restart lending between banks by using the Federal Deposit Insurance Corp. to insure senior preferred bank debt, which commonly includes funds borrowed from other banks.
Many details are being worked out, but opening up the availability of credit is considered vital not only to the financial industry but also to the entire economy. Almost all businesses depend on credit for everything from meeting payrolls to making investments in new products and equipment.
Though the administration is moving ahead with plans to purchase hundreds of billions of dollars in toxic, mortgage-related securities -- the centerpiece of the original bailout scheme -- the new strategy is likely to move that into a secondary position.
