Special Report:  Global Financial Crisis

    WASHINGTON, Oct. 15 (Xinhua) -- Wall Street tumbled again Wednesday with all the major indexes dropping more than 7 percent, a day after the Bush Administration announced new measures to take stake in major banks to strengthen the banking industry.

    Under the take-it-or-leave-it plan, the U.S. government will use a portion of the 700 billion dollar financial rescue package to inject capital into banks by directly purchasing equity shares.

U.S. Secretary of Treasury Henry Paulson (R) listens to U.S. President George W. Bush (L) speaks during a Cabinet meeting to discuss the economy in the Cabinet Room at the White House in Washington October 15, 2008.  (Xinhua/Reuters Photo) Photo Gallery>>>

    The government will initially buy stocks in nine major U.S. banks under its 250 billion dollars purchase plan, said President George W. Bush.

    Bank of America, JPMorgan Chase, Citigroup and Wells Forgo, will each get 25 billion dollars in government funds, Goldman Sachs and Morgan Stanley 10 billion dollars each, and Bank of New York Mellon and State Street between 2 billion and 3 billion dollars each.

    In return, the government will get ownership stakes in the financial institutions. Banks, meanwhile, will have to accept limitations on executives' compensation.

    "This new capital will help struggling banks fill the hole created by losses during the financial crisis, so they can resume lending and help spur job creation and economic growth," Bush said.

    Meanwhile, "effective immediately, the Federal Deposit Insurance Corporation (FDIC) will temporarily guarantee most new debt issued by insured banks," Bush announced.

    He said that this will address one of the central problems plaguing the financial system -- banks have been unable to borrow money.

    Created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s, the FDIC preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions.

    Also, the FDIC will immediately and temporarily expand government insurance to cover all non-interest bearing transaction accounts. These accounts are used primarily by small businesses to cover day-to-day operations.

    The fourth measure Bush announced is that the Federal Reserve will soon finalize work on a new program to serve as a buyer of last resort for commercial paper.

    "This is a key source of short-term financing for American businesses and financial institutions," Bush said.

    By unfreezing the market for commercial paper, he said, the U.S. central bank will help American businesses meet payroll, and purchase inventory, and invest to create jobs.

    "These efforts are designed to directly benefit the American people by stabilizing the financial system and helping the economy recover," the president said.

    The new measures the U.S. government is taking came after the G7 revealed a plan of action in Washington Friday to jointly fight the ongoing global financial crisis, pledging "to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth."

    Bush said he's confident that "in the long run, that this economy will come back."

    Investors signaled growing confidence that the biggest U.S. banks would survive the crisis. The cost of buying insurance against defaults by some big U.S. banks fell by record amounts, while remaining above normal levels.

    Interbank loan rates starting has eased, though modestly, while the yield on safe short-term U.S. Treasuries moved higher, as risk appetite improved, according to the media.

    The government rescue "was important in removing the immediate panic. But there's still going to be a sense of vigilance in the credit markets, and the bigger question is how much of this becomes a credit problem later on," said Kathleen Shanley, an analyst covering financial institutions at Gimme Credit, a research firm.

    However, the stock market failed to build on its historic gain on Monday amid concerns over a deep recession.

    The Dow Jones industrials tumbled by 733.08 points to 8,577.91 on Wednesday, following a 77 point decline on Tuesday.

    Anil Kashyap, professor of economics and finance at the University of Chicago's Graduate School of Business, said that it is hard to tell whether the 250 billion dollars will be sufficient to encourage banks to lend again.

    "This plan will work if we wind up with everybody pretty well capitalized," Kashyap said. "But if it doesn't reach that point, we'll be back in soup down the road."

    David Reilly, a columnist of The Wall Street Journal, said that the U.S. economy will still be faltering, earnings will remain under pressure, unemployment will continue rising and home prices will keeping falling.

    "In other words, even if Paulson's latest plan addresses immediate problems facing the financial system, markets still have to contend with long-term issues that existed before the market meltdown began in September," he added.