U.S. Treasury pumps money into banking system

By David Lawder and Mark Felsenthal

WASHINGTON (Reuters) - The United States said on Tuesday it is injecting $250 billion (142.7 billion pounds) into U.S. banks, a step that Treasury Secretary Henry Paulson called "objectionable" but vital to keep fear from swamping the U.S. economy.

Moving swiftly after European officials announced similar moves Monday, Paulson retooled an earlier financial rescue program into one that potentially gives the government equity stakes in a wide variety of large and small lenders.

"There is a lack of confidence in our financial system....that must be conquered because it poses an enormous threat to our economy," Paulson said, citing a credit freeze that saps the lifeblood of commerce by making banks unwilling to lend to one another, to businesses or to consumers.

President George W. Bush initially broached the revised plan for getting the government involved in bank ownership at a brief Rose Garden ceremony, pledging it would be a "limited and temporary" venture until banks could buy the shares back.

The proposal initially sent stock prices up sharply but they steadily lost momentum to end down after Monday's big 936.42-point jump. The Dow Jones industrial average lost 76.62 points to end at 9,310.99 and the high tech-laden Nasdaq Composite Index dropped 65.24 points to 1,779.01.

U.S. Treasury debt prices also sank but the cause was investor concern about how much more the heavily indebted government must borrow to carry out its financing plans.

Paulson held a joint press conference with Federal Reserve Chairman Ben Bernanke and the chairman of the Federal Deposit Insurance Corp., Sheila Bair, where he warned banks should "not take this new capital to hoard it, but to deploy it."

Initially nine banks will participate, selling preferred shares to the government and accepting restrictions on fat pay packages, and Paulson said similar terms will be offered to small and medium-sized banks and thrifts across the country.