The lack of confidence in the U.S. financial system "must be conquered because it poses an enormous threat to our economy," said U.S. Treasury Secretary Henry Paulson on Tuesday, adding that it is imperative for the government to purchase equity stakes in multiple financial institutions.

Paulson said $250 billion of the $700 billion financial rescue package would be used to purchase preferred stock. Half of that figure - $125 billion - will be used for nine major financial institutions who have already agreed to the deal, while the other half will be open to "a broad array of small and medium-sized banks and thrifts across the nation."

"Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes during the period that Treasury holds equity issued through this program," the treasury secretary said.

Paulson also said the taxpayer money used for the program will be paid back "with a reasonable return," and that warrants will be received for common shares in participating institutions.

"Government owning a stake in any private U.S. company is objectionable to most Americans - me included," Paulson said. "Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable. When financing isn't available, consumers and businesses shrink their spending, which leads to businesses cutting jobs and even closing up shop."

By Patrick McGee and edited by Sarah Sussman
©CEP News Ltd. 2008