Henry Paulson (left) with Ben Bernanke in Washington on Tuesday. (Reuters)

New York, Oct. 14 (Reuters): The US today ushered in a new era in banking with plans to take equity stakes worth up to $250 billion in financial institutions, an incursion into the private sector that US officials called a regrettable last resort.

The US government followed European powers that agreed to recapitalise their banks a day earlier, triggering a global stock market rebound that continued on Tuesday.

“This is an essential short-term measure to ensure the viability of America’s banking system,” US President George W. Bush said in a televised address. “These measures are not intended to take over the free market but to preserve it,” Bush said.

The US treasury will buy non-voting preferred shares in major financial institutions, with stakes in each limited to $25 billion. Bank executives must accept limits on their pay and standards of corporate governance.

Bush also said the Federal Deposit Insurance Corporation would guarantee new bank debt, temporarily insure senior preferred debt issued by banks and thrifts, and that the US Federal Reserve would become a buyer of last resort of commercial paper — debt instruments companies use to fund activities.

US treasury secretary Henry Paulson said nine banks that he described as “healthy institutions” had agreed to accept government stakes for the good of the economy, a government intervention unthinkable before the credit crisis.

Paulson, who appeared with Federal Reserve chairman Ben Bernanke and Federal Deposit Insurance Corp chairman Sheila Bair at a press meet before the US markets opened, said the measures were “objectionable” to him but were necessary because of a spreading lack of confidence in financial markets.

Bernanke expressed confidence that the latest bid to pump money into banks to try to persuade them to resume normal lending will work but cautioned it won’t bring instant relief to a severely stressed US economy.

Bair said the overwhelming majority of US banks remained safe and sound but they were beset by a loss of confidence that policy makers were determined to counter.

The Dow and S&P 500 slipped after a 4 per cent surge at the open. The Nasdaq was down slightly.

The FTSE 100, the UK’s top index, was up more than 3 per cent, while stocks in the rest of Europe also closed higher. Japan’s Nikkei climbed more than 14 per cent — its biggest one-day gain in history.