WASHINGTON — The government will buy an ownership stake in a broad array of American banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said late Friday, announcing the historic step after stock markets jolted around the world despite all efforts to slow the selling stampede.
Separately, the United States and six other industrial powers pledged to take "decisive action and use all available tools" to prevent a worldwide economic catastrophe.
"This is a period like none of us has ever seen before," Paulson said at a rare Friday night news conference. He said the government program to purchase stock in private U.S. financial firms will be open to a broad array of institutions, including banks, in an effort to help them raise desperately needed money.
Paulson said the U.S. program would be designed to complement banks' own efforts to raise fresh capital from private sources. The government's stock purchases will be of nonvoting shares so it will not have power to run the companies.
The administration received the authority to take such direct action in the $700-billion economic rescue bill that Congress passed and President Bush signed last week.
Earlier Friday, stock prices hurtled downward in the United States, Europe and Asia, even as President Bush tried to reassure Americans and the world that the U.S. and other governments were aggressively addressing what has become a near panic.
A sign of how bad things have gotten: A drop of 128 points in the Dow Jones industrials was greeted with sighs of relief after the index wildly swung more than 1,000 points on Friday. The week ended as the Dow's worst ever, with the index down an incredible 40.3 percent since its record close almost exactly one year earlier, on Oct. 9, 2007.
Investors suffered a paper loss of $2.4-trillion for the week, as measured by the Dow Jones Wilshire 5000 index, and for the past year the losses have totaled $8.4-trillion.
It was even worse overseas on Friday. Britain's FTSE index ended below the 4,000 level for the first time in five years; Germany's DAX fell 7 percent and France's CAC-40 finished down 7.7 percent. Japan's benchmark Nikkei 225 index fell 9.6 percent, also hitting a five-year low. For the week, the Nikkei lost nearly a quarter of its value. Russia's market never even opened.
Paulson announced the administration's new effort to prop up banks at the conclusion of discussions among finance officials of the Group of Seven major industrialized countries. While agreeing Friday to a coordinated rescue plan, the countries fell short of offering concrete steps to backstop bank lending.
In a five-point plan, issued after finance ministers met at the Treasury Department, the countries broadly endorsed the idea of taking ownership positions in banks — a strategy first adopted by Britain and now emerging as a major part of the rescue effort in the United States.
But the nations were vague on how or when that will happen, and did not endorse a proposal by Britain to provide coordinated guarantees of lending between banks, as a way to shake loose credit markets.
Many investors had hoped the meeting of the finance ministers from the world's leading economies would result in more concrete steps to restore the paralyzed credit markets, and lay out a blueprint for recapitalizing banks.
"This fell short," said Adam Posen, the deputy director of the Peterson Institute for International Economics. "It all seems to be moving toward direct injection of capital, but why aren't they just saying it?"
Treasury officials said the United States may embark on direct injections of capital into banks within the next two weeks.
Paulson said hopes for a grand global solution were naive, given the differences among countries. Indeed, other finance ministers had tried to reduce expectations for the meeting.
The Group of Seven session was one of a flurry of meetings in conference rooms from the Federal Reserve to the International Monetary Fund at which officials discussed potential remedies for the financial system.
The timing was fortuitous: the world's financial elite had gathered in Washington for the annual meetings of the monetary fund and the World Bank. But the pageantry and parties that normally characterize this gathering have been replaced by an atmosphere of high drama and deep gravity.
Events also seem to have upended the Treasury's plan to stabilize the financial system by buying billions of dollars of troubled assets from the banks — a plan that Paulson and his Treasury Department colleagues expended enormous energy designing and selling to a skeptical Congress.
"The original Paulson plan didn't hit the nail on the head," said Kenneth Rogoff, an economist at Harvard and an adviser to the Republican presidential candidate, John McCain. "It's one thing to go back to Congress six months later and say 'I didn't ask for enough.' It's another to go back after six days and say 'I didn't ask for enough.' "
The Treasury has been soliciting feedback about capital injections from Wall Street chief executives, top hedge fund managers, and other big investors, according to a senior banker briefed on the proposal.
One message the industry has given officials is that their plan should help strong banks, rather than save deeply troubled ones.
Another suggestion is for regulators to effectively halt dividend payments for all banks in which the government injects capital, this banker said. This would help remove the stigma of lowering the dividend, and keep about $55-billion a year from leaking out of the banking system.
The United States and Germany appear to be the pivotal players in determining whether recapitalizing banks becomes a global standard, given that Britain has already adopted such a plan, and France, Italy, and Japan generally support it. Japan recapitalized its banks after a financial crisis in the 1990s.
Information from the New York Times, Associated Press and Washington Post was used in this report.