Paulson's $250 Billion Bank Buy

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The substantial sums involved make clear that Uncle Sam could be on the way to owning a vast chunk of the U.S. banking sector. A government investment of $250 billion amounts to perhaps 25% to 30% of the market capitalization for publicly traded banks, says Rajiv Sobti, chief investment officer at Nomura Global Alpha, a unit of Nomura Asset Management USA. Hundreds of banks could eventually receive such equity funding.

Regionals May Come Next

Analysts say the decision to invest simultaneously in nine banks was aimed at eliminating any stigma attached to applying for the voluntary program. While some of the banks resisted, saying they did not need the capital (and may not have wanted the government as a shareholder either). Paulson argued that it was necessary for them all to take the capital simultaneously. For any one bank to ask for help, notes Daniel Clifton, Washington analyst for institutional broker Strategas Research Partners, would be to signal to the world that it knew it couldn't survive and had no hope of attracting private capital. Even deeply troubled banks might have resisted such a move for fear of the intensified pressure it would have put on their already battered shares.

There was only one way to get around that problem, which could have caused the plan to stall out before it began. Treasury had little choice but to "jawbone them into taking the money in a coordinated fashion all at the same time," Clifton says. "They're staking all their hopes on this plan now—it has to work."

Clifton thinks a few struggling regional banks are likely to be next on Treasury's list of equity buys so the program isn't perceived by the public—or Congress—as only assisting Wall Street. To maintain political support, Treasury officials are said to be acutely aware of the need to back such banks, which play a big role in many smaller local communities.

Europe Leads the Way

The FDIC will also temporarily boost deposit insurance limits on noninterest-bearing bank accounts. General deposit insurance was already lifted from $100,000 to $250,000 in the legislation recently passed by Congress to authorize the $700 billion industry rescue. But with European banks having agreed this weekend to lift insurance limits on all deposits, the U.S. had little choice but to follow suit or see a flood of money head into foreign banks.

The higher limits on noninterest-bearing accounts will cover payroll accounts, mortgage escrow accounts, and other accounts that might not otherwise have been covered, says Scott Talbott, a senior vice-president at Financial Services Roundtable, an industry group. The move was primarily aimed at reassuring small businesses and convincing them not to shift their accounts to large banks.

"Once the European countries came out with these moves, the U.S. had to as well," says Brian Gardner, a Washington policy analyst at Keefe Bruyette & Woods, which specializes in the financial-services sector. "Otherwise you would have had depositors arbitraging between countries, which you just couldn't have."

A Jump-Start for Lending

Moreover, the FDIC will temporarily the senior debt of all FDIC-insured institutions and their holding companies.Many analysts believe such guarantees are necessary to get banks lending again, since they are hoarding capital and no longer trust that other institutions will be able to repay their loans if the credit squeeze continues.

The Federal Reserve, meanwhile, said it will begin buying massive amounts of short-term debt on Oct. 27. The Fed is invoking Depression-era emergency powers to buy commercial paper, according to the Associated Press—a crucial short-term funding that many companies rely on to pay their workers and buy supplies. Last week the Fed said it intended to take the action but didn't specify when.