Describing the government’s financial bailout plan as “extensive, powerful and transformative,” Treasury Secretary Henry M. Paulson. said on Tuesday that the injection of $250 billion into the nation’s banks was needed to restore confidence and avoid a collapse of the financial system. The plan is to purchase stakes in a wide variety of banks in an effort to restore confidence in the sector.

President George W Bush said the move would help to return stability to the US banking sector and ultimately help preserve free markets. US federal authorities will also temporarily insure most new debt issued by US banks.
The moves echo similar steps taken by the UK and other European countries.
"This is an essential short-term measure to ensure the viability of America's banking system," Mr Bush said.

With the proposal, the United States follows similar plans announced Monday across Europe initiated first by Prime Minister Brown— almost all intended to inject money into the banks and unfreeze the credit markets. Markets around the world have rebounded on news of the coordinated efforts. The Dow Jones industrial average gained 936 points, or 11 percent on Monday, the largest single-day gain in the American stock market since the 1930s, and gained more than 300 points more in the opening minutes of trading on Tuesday. European markets were up at least 5 percent on Tuesday after rising nearing 10 percent Monday.

"This is not intended to take over the free market, but to preserve it."
Mr Bush also said that the Federal Reserve would finalise work on a new programme that would make it the buyer of last resort for companies' short-term debt, known as commercial paper. Also, government deposit insurance is being expanded to cover accounts used by small businesses.

In addition to injecting money into the banks, according to the plan, the United States would also guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers.

The F.D.I.C. 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.

The US plan - effectively part-nationalisation - comes after the bosses of the country's largest banks were summoned to a special meeting at the US Treasury on Monday.
Treasury Secretary Henry Paulson said that the lack of confidence in the financial system was a threat to the US economy. He said that taking equity stakes in banks "was objectionable to most Americans, including myself".

"We regret taking these actions," Mr Paulson said. but "But we must do this to restore confidence in the financial system."

Mr Paulson said the government would buy stakes in a "wide variety" of banks and thrifts - financial institutions similar to building societies in the UK.
Nine banks, which Mr Paulson described as "healthy institutions", have so far signed up to the deal.

Federal Reserve chairman Ben Bernanke said that the US strategy would evolve and adapt to new developments: "We will not stand down until we have achieved our goals of repairing and reforming our financial system," he said.