U.S. to take $250 billion bank stakes

By Daniel Trotta

NEW YORK (Reuters) - The United States ushered in a new era in banking on Tuesday with plans to take equity stakes totalling up to $250 billion (142.7 billion pounds) in financial institutions, an incursion into the private sector that U.S. officials called a regrettable last resort.

Markets initially rallied on the rescue plan, continuing the previous day's rebound, but recession fears soon took over and Wall Street stocks closed lower.

U.S. Treasury Secretary Henry Paulson said government ownership of big stakes in banks was "objectionable" but necessary to head off the financial crisis.

"At a time when events naturally make even the most daring investors more risk-averse, the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it," Paulson said.

The move followed bank recapitalization announcements by European governments on Monday.

The U.S. Treasury will buy nonvoting preferred shares in major financial institutions, with stakes in each limited to $25 billion. Bank executives must accept standards of corporate governance and limits on their pay.

Paulson said nine banks that he described as "healthy institutions" had agreed to accept government stakes for the good of the U.S. economy -- a government intervention unthinkable before the credit crisis, the worst since the 1930s Great Depression.

"These measures are not intended to take over the free market but to preserve it," U.S. President George W. Bush said.