By Daniel Trotta
NEW YORK (Reuters) - The United States ushered in a new era in banking on Tuesday with plans to take equity stakes worth up to $250 billion in financial institutions, an incursion into the private sector that U.S. officials called a regrettable last resort.
The U.S. government followed European powers that agreed to recapitalize their banks a day earlier, triggering a global stock market rebound that continued on Tuesday.
"This is an essential short-term measure to ensure the viability of America's banking system," U.S. President George W. Bush said in a televised address.
"These measures are not intended to take over the free market but to preserve it," Bush said.
The U.S. Treasury will buy nonvoting preferred shares in major financial institutions, with stakes in each limited to $25 billion. Bank executives must accept limits on their pay, and standards of corporate governance.
U.S. Treasury Secretary Henry Paulson said nine banks that he described as "healthy institutions" had agreed to accept government stakes for the good of the U.S. economy -- a government intervention unthinkable before the credit crisis, the worst since the 1930s Great Depression.
"Government owning a stake in any private U.S. company is objectionable to most Americans, me included," Paulson said. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."
Bush also said the Federal Deposit Insurance Corporation would guarantee new bank debt, temporarily insure senior preferred debt issued by banks and thrifts, and that the Federal Reserve would become a buyer of last resort of commercial paper -- the debt instruments companies use to fund activity.
The latest measures are intended to stimulate interbank lending and the commercial paper markets, whose stagnation may have already pushed the U.S. economy into recession.
Some relief was evident in money markets with interbank costs for overnight lending down.
Similar moves in Europe helped restore confidence among investors on Monday.
Britain, Germany, France and others pledged more than 1 trillion euros ($1.36 trillion) in direct capital injections for banks and to underwrite lending between banks that has all but frozen, choking off funds that drive business and industry.
Japan joined the global push, saying it could inject public funds into regional banks to make sure small firms can get cash.
MARKETS CLIMB
The Dow and the S&P 500 slipped after a 4 percent surge at the open that came one day after both indexes registered their biggest one-day point gain in the wake of last week's panic sell-off. The Nasdaq was down slightly. U.S. bank stocks soared.
European shares rose nearly 3 percent, also paring earlier gains. Japan's Nikkei climbed more than 14 percent -- its biggest one-day gain in history.
"Clearly the markets are relieved by these actions and see them as a way of ensuring the financial system doesn't collapse in on itself," said David Resler, chief economist at Nomura Securities in New York.
But, he warned, "We're in a period of economic stagnation and contraction. It's probably going to last another few months and into next year, but at the same time this is happening we should be a little encouraged by the drop of oil prices we've had recently."
With three weeks to go before the U.S. presidential election, Republican candidate John McCain on Tuesday was due to reveal a proposal aimed at helping Americans cope with a sharp plunge in the stock market.
Democrat Barack Obama announced a raft of relief measures on Monday.
The chief executive of one of the world's biggest private equity firms said on Tuesday the injection of government cash into U.S. banks, alongside similar measures around the world, could break the back of the credit crisis.
"We will be looking today to an absolute sea change in the global financial system in terms of liquidity," Blackstone Group CEO Stephen Schwarzman told a private equity conference in Dubai.
This could be the action that "breaks the back of the credit crisis," he said.
But the world economic outlook was littered with recessionary signals.
Europe's major economies showed signs of flagging output and falling business confidence, and experts warned of dangers ahead as U.S. companies report shrinking third-quarter earnings.
German investor sentiment declined sharply this month, the heavyweight ZEW research institute survey showed, although many responses were given before Berlin's bank package was announced.
The French economy contracted 0.1 percent in the third quarter, the Bank of France said, and British inflation hit a 16-year high of 5.2 percent in September.
Former U.S. Federal Reserve Chairman Paul Volcker said the world's biggest economy was already in recession.
(Reporting by Reuters bureaus around the world; Editing by Brian Moss and Steve Orlofsky)