Paulson Urges Banks to "Deploy" New Capital

In a speech this morning announcing the Governments' new initiatives to combat the financial crisis, Treasury Secretary Paulson urged the nine firms which are to receive as much as $250 billion in capital injections to use the funds to spur economic growth.

"We must restore confidence in our financial system," Paulson said. "The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it."

While the name of the nine banks weren't announced at this morning's press conference, they are widely assumed to be Citigroup, Goldman Sachs, Wells Fargo, JPMorgan Chase, Bank of America, Merrill Lynch (which was recently bought by BofA0, Morgan Stanley, State Street and Bank of New York Mellon.

"These are healthy institutions, and they have taken this step for the good of the U.S. economy," Paulson said.

According to the Wall Street Journal, "some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure from Treasury Secretary Henry Paulson in a meeting Monday."

Bank Debt Guaranteed

Federal Reserve Chairman Bernanke, speaking at the same press conference, announced the signing of the systemic risk exception to the FDIC Act, which allows the senior debt of all FDIC institutions and their holding companies to be guaranteed.

Fed To Purchase Commercial Paper

Mr. Bernanke also announced further details of the Commercial Paper Funding Facility (CPFF) program, which beginning on October 27 will purchase 3-month commercial debt from "high-quality issuers."

"Together these three steps significantly strengthen the capital position and funding ability of U.S. financial institutions, enabling them to perform their role of underpinning overall economic growth. These actions demonstrate to market participants here and around the world the strength of the U.S. government’s commitment to take all necessary steps to unlock our credit markets and minimize the impact of the current instability on the overall U.S. economy. The actions taken today are a powerful step toward restoring the health of the global financial system," said Mr. Bernanke in his prepared remarks.

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