World - US;Bush plans nationalizing of banks

Edmund L Andrews & Mark Landler

WASHINGTON: As international leaders gathered here on Saturday to grapple with the global financial crisis, the Bush administration embarked on an o
verhaul of its own strategy for rescuing the foundering financial system.

Two weeks after persuading Congress to let it spend $700 billion to buy distressed securities tied to mortgages, the Bush administration has put that idea aside in favour of a new approach that would have the government inject capital directly into the nations banks in effect, partially nationalizing the industry.

The Treasury Department's surprising turnaround on the issue of buying stock in banks, which has now become its primary focus, has raised questions about whether the administration squandered valuable time in trying to sell Congress on a plan that officials had failed to think through in advance. While the Treasury says it still plans to buy distressed assets, the scope of that plan is unclear. Treasury secretary Henry M Paulson Jr has refused to say whether the capital infusion programme for banks would be bigger than the original plan to buy troubled assets.

Still, Treasury has directed Fannie Mae and Freddie Mac, the state-owned mortgage giants, to ramp up their purchases of hard-to-sell mortgage bonds, in what could be a speedier and less formal process than the auctions proposed by the Treasury. Underscoring the gravity of the situation, President Bush convened an early morning meeting at the White House on Saturday with finance ministers from the Group of 7 industrialized countries. "All of us recognize that this is a serious global crisis, and therefore requires a serious global response, for the good of our people, Bush said.

Bush said the countries had agreed to general principles to respond to the crisis, including working to prevent the collapse of important financial institutions and protecting the deposits of savers. But he offered no details on other measures, suggesting that there were still differences among countries about which steps to take to shore up their respective financial systems.

To some extent, the effort to agree on a coordinated plan is being driven less by the hope that such measures will carry more punch than by the fear that nations acting alone could destabilize the system. Those worries grew in recent days when Iceland seized its three major banks, which were failing, and appeared to guarantee the deposits of Icelanders over those of foreigners. That provoked a fierce reaction from Britain, which is now in talks with Iceland to get back the deposits of British citizens.

With US and Europe working together on ways to secure their banking systems, economists are concerned that money may flow out of other countries, particularly emerging markets, to Western countries if investors decide that those markets are not as safe. Germany has been reluctant to put state capital into banks, though officials said there were signs of movement in that position