President George W. Bush announced a plan Tuesday to invest as much as $250 billion in banks, the government's boldest move yet and the biggest intervention in the American banking system since the Depression.

Bush also said that United States would guarantee most new debt issued by banks, a measure meant to encourage the banks to resume lending to one another and to customers, officials said.

The Federal Deposit Insurance Corp. will 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 that have adopted such blanket guarantees.

"It will take time for our efforts to have their full impact, but the American people can have confidence about our long-term economic future," Bush said.

Treasury Secretary Henry Paulson Jr. outlined the plan to nine of the country's leading bankers at a Monday afternoon meeting, officials said. He essentially told the participants that they would have to accept government investment for the good of the American financial system.

Of the $250 billion, which will come from the $700 billion bailout approved by Congress, half is to be injected into nine big banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase, officials said. The other half is to go to smaller banks and thrifts. The investments will be structured so that the government can benefit from a rebound in the banks' fortunes.

Bush announced the measures Tuesday morning after a harrowing week in which confidence vanished in financial markets as the crisis spread worldwide and government leaders engaged in a desperate search for remedies to the spreading contagion. They are seeking to curb the severity of a recession that has come to appear all but inevitable.

Over the weekend, central banks flooded the system with billions of dollars in liquidity, throwing out the traditional financial playbook in favor of a series of moves that officials hoped would get banks lending again.

European countries - including Britain, France, Germany and Spain - announced aggressive plans to guarantee bank debt, take ownership stakes in banks or prop up ailing companies with billions in taxpayers' funds.

The U.S. Treasury's plan would help the United States catch up to Europe in what has become a race between countries to reassure investors that their banks will not default, or that other countries will not one-up their rescue plans and, in so doing, siphon off bank deposits or investment capital.

"The Europeans not only provided a blueprint but forced our hand," said Kenneth Rogoff, a professor of economics at Harvard University and an adviser to John McCain, the Republican presidential candidate. "We're trying to prevent wholesale carnage in the financial system."

In the process, Rogoff and other experts said, the government is remaking the financial landscape in ways that would have been unimaginable a few weeks ago - taking stakes in the industry and making Washington the ultimate guarantor for banking in the United States.

But the pace of the crisis has driven events, and fissures in places as far-flung as Iceland, which suffered a wholesale collapse of its banks, persuaded officials to act far more decisively than they had previously.

"Over the weekend, I thought it could come out very badly," said Simon Johnson, a former chief economist of the International Monetary Fund. "But we stepped back from the cliff."

The U.S. guarantee on bank debt is similar to one announced by several European countries Monday and is meant to unlock the lending market between banks. Banks have curtailed such lending - which is considered crucial to the smooth running of the financial system and the broader economy - because they fear that they will not be repaid if a bank borrower runs into trouble.

But officials said they hoped that the guarantee on new senior debt would have an even broader effect than an interbank lending guarantee because it should also stimulate lending to businesses.

Another part of the government's remedy is to extend the federal deposit insurance to cover all small-business deposits. Federal regulators recently have been noticing that small-business customers, which tend to carry balances over the federal insurance limits, had been withdrawing their money from weaker banks and moving it to bigger, more stable banks.

Congress already raised the U.S. deposit insurance limit to $250,000 this month, extending coverage to roughly 68 percent of small-business deposits, according to estimates by Oliver Wyman, a financial services consulting firm. The new rules would cover the remaining 32 percent, officials said.

"Imposing unlimited deposit insurance doesn't fix the underlying problem, but it does reduce the threat of overnight failures," said Jaret Seiberg, a financial services policy analyst at Stanford Group in Washington. "If you reduce the threat of overnight failures, you start to encourage lending to each other overnight, which starts to restore the normal functioning of the credit markets."

Recapitalizing banks is not without its risks, experts warned, pointing to the example of Britain, which announced its program last week and injected its first capital into three banks Monday.

Shares of the newly nationalized banks - Royal Bank of Scotland, HBOS and Lloyds - slumped Monday, despite a surge in banks elsewhere, because shareholder value was diluted by the government.

The move, analysts said, makes the government the biggest banker in Britain. And it creates a two-tier banking system in which the nationalized banks are run like utilities and others are free to pursue profit growth. As part of the plan, the chief executives of the three banks stepped down.

Still, Paulson's strategy was backed by lawmakers, including Senator Charles Schumer, a Democrat of New York, who said he preferred capital injections to buying distressed mortgage-related assets - a proposal that the Treasury pushed aggressively before its turnabout.

In a letter to Paulson on Monday, Schumer, chairman of the Joint Economic Committee of Congress, urged the Treasury to demand that banks receiving capital eliminate their dividends, restrict executive pay and stick to "safe and sustainable, rather than exotic, financial activities."

"I don't think making this as easy as possible for the financial institutions is the way to go," Schumer said during a conference call with reporters. "You need some carrots but you also need some sticks."

But officials said the banks would not be required to eliminate dividends, nor would the chief executives be asked to resign. But they will be held to strict restrictions on compensation, including a prohibition on "golden parachute" severance packages, which were part of the $700 billion bailout law passed by Congress.

The nine chief executives met in a conference room outside Paulson's ornate office, people briefed on the meeting said. They were seated across the table from Paulson; Ben Bernanke, chairman of the Federal Reserve; Timothy Geithner, president of the Federal Reserve Bank of New York; the Federal Reserve governor Kevin Warsh; and the comptroller of the currency, John Dugan.

Among the bankers attending were Kenneth Lewis of Bank of America, James Dimon of JPMorgan Chase, Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, Vikram Pandit of Citigroup, Robert Kelly of Bank of New York Mellon and John Thain of Merrill Lynch.

Bringing together all nine executives and directing them to participate was a way to avoid stigmatizing any one bank that chose to accept the government investment.

The preferred stock that each bank will have to issue will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years. The government will also receive warrants worth 15 percent of the face value of the preferred stock.

For instance, if the government makes a $10 billion investment, then the government will receive $1.5 billion in warrants. If the stock goes up, taxpayers will share the benefits. If the stock goes down, the warrants will be worthless.

As Treasury embarked on its recapitalization plan, it offered some details on the nuts-and-bolts of the broader bailout effort. The program's interim head, Neel Kashkari, said the Treasury had filled several senior posts and selected the Wall Street firm Simpson Thacher as a legal adviser.

It named an investment management consultant, Ennis Knupp, based in Chicago, to help it select asset management firms to buy distressed bank assets. And it plans to announce the firm that will serve as the program's prime contractor, running auctions and holding assets, within the next day.

"We are working around the clock to make it happen," said Kashkari, a former Goldman Sachs banker who has been entrusted with the job of building this operation from scratch within weeks.

Reporting was contributed from New York by Eric Dash, Louise Story and Ben White.

Originally published by The New York Times Media Group.

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