Tuesday the US government announced a $250 billion plan to help banks repair their balance sheets and restore confidence in markets. The government will inject capital directly into the banking system by purchasing preferred stock and warrants to purchase significant stakes across a number of banks.



Half of the $250 billion will go to nine banks, JPMorgan Chase, Citigroup, Goldman Sachs Group, Morgan Stanley, Bank of America Corp, Merrill Lynch & Co, Wells Fargo & Co, Bank of New York Mellon, and State Street Corp. Treasury Secretary Paulson pushed the top tier banks to participate so there would be no stigma for other banks associated with the plan.

Some banks were reluctant to participate in the plan; most notably JP Morgan whose Chief Jamie Dimon stated the bank did not need the additional capital. JPMorgan, which recently raised funds for its acquisition of Washington Mutual, faces 11 percent dilution from the plan. Not all bankers supported the plan but Secretary Paulson realized that an industry wide solution is needed.

Stock market investors support the plan hoping I will help to accelerate the thaw of frozen credit markets. The treasury also will back new bank debt, guarantee certain deposits and support commercial paper. Shares of Morgan Stanley were up 21% Tuesday, Citi stock rose 18 percent, and Goldman shares were up 11%. Not all banks reacted positively and JPMorgan shares fell 3 percent Tuesday amid worries the new capital was not needed.

Many analysts think that in the long term bank and broker stocks would stall if investors shift their focus from basic survival to the weak business environment. That will mean rising losses from loans and problem assets as well as lower revenue.

Wall Street observers say that stability that comes from the new capital outweighs any short term dilution or cutbacks in executive pay. Under the bailout plan all the banks involved will be required to curb executive pay. "Golden parachutes" for departing bosses will be banned, as will bonus programs that encourage excessive risk-taking.

While there are signs the bailout is working it remains to be seen how it will affect currency markets. In Europe the Euro rose for the first time in weeks and some interpret this as a sign that the massive European bailout has inspired cautious investor confidence. The dollar holds steady in Forex markets which has amazed some given the state of the US economy.