BofA gets $20 billion in aid, conditions in Japan tighten
38 minutes ago
By Patrick Rucker and Leika Kihara
WASHINGTON/TOKYO (Reuters) - Bank of America will get another $20 billion in state cash and the U.S. Senate cleared the release of the remaining $350 billion of bailout funds, buoying stock markets despite fears of more bank losses.
As further evidence that stricken credit markets are not responding to the efforts of the world's central banks, which have slashed interest rates and poured billions into lenders, Bank of Japan Governor Masaaki Shirakawa said financial conditions in the world's second-biggest economy were tightening rapidly.
Conditions in France were also on the slide, as its central bank said it expected the economy to have contracted sharply in the final quarter of 2008, after its business survey showed sentiment soured and economic activity declined.
British ministers were reported to be working on a new bank bailout plan, and Ireland nationalized Anglo Irish Bank in a dramatic move to save its third-largest lender from possible collapse.
As Ireland's Finance Minister Brian Lenihan acknowledged that Ireland's reputation had been damaged by the rescue, the cost of insuring the country's debt rose sharply on Friday.
But stock markets in Asia and Europe took heart from The Senate vote and Bank of America package. The Nikkei closed up 2.6 percent, Europe's biggest shares were up the same amount, and futures for the major U.S. indexes all pointed to gains of well over 1 percent.
Bank of America and Citigroup will both release results later on Friday, having brought forward their reporting dates under pressure from investors who question their ability to handle soaring bad debts as the recession deepens.
"There's been another wave of the banking crisis," said Bernard McAlinden, strategist at NCB Stockbrokers in Dublin. "There was bad lending. The problem was compounded by the sheer weakness of the economy. So now decent lending has turned bad. It's gone full circle."
FEAR IN THE MARKETS
Shares in Bank of America and Citigroup had tumbled on Thursday, while the U.S. two-year interest rate swap spread -- a gauge of risk aversion -- swelled to retest its widest levels in a week and European banks hoarded cash.
Moody's Investors Service cut the debt rating of JPMorgan Chase & Co by one notch, citing potential losses over the next 15 months.
"Clearly we are back to a period of fear in the markets and specifically about the financials," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.
Bank of America will receive $20 billion of capital, in exchange for preferred stock, and a federal backstop against $118 billion of bad assets under an emergency plan announced by the Treasury Department, the U.S. Federal Reserve and Federal Deposit Insurance Corp.
The capital injection, which comes on top of the $25 billion the bank has already received under the Troubled Asset Relief Program (TARP), is aimed at helping it absorb credit losses at Merrill Lynch & Co, which it bought on January 1.
Citigroup, which has already received $45 billion from TARP, is expected to post its fifth straight multibillion dollar quarterly loss on Friday and unveil a plan to significantly shrink its balance sheet and business model.
The U.S. Senate on Thursday rejected a bid to block the release of the second half of a $700 billion bailout program, handing an early political victory to President-elect Barack Obama, who will be sworn in next Tuesday.
FINANCIAL STRAIN
But Bank of Japan Governor Shirakawa's comments highlighted a renewed strain in financial markets as investors realize the credit crisis has not yet run its course.
"Japan's financial system is stable as a whole. But sustained global market tensions are affecting financial institutions' businesses through stock price falls and rising credit costs," Shirakawa told a meeting of the central bank's regional branch managers.
Reflecting renewed concerns about banks, The Times newspaper said British ministers would be working over the weekend on proposals that could include fresh capital injections for banks, a relaxation of rules on balance-sheet strength and government guarantees of toxic assets.
Ireland stepped in to take full control of Anglo Irish Bank, whose stock market value had gone into freefall since a loans scandal last month, to secure the niche lender's 80 billion euros of deposits.
"We cannot afford the risk of any default in honoring the deposits; that is fundamental," Finance Minister Lenihan told a late-night news conference.
The Irish government tied the state to the fate of the banking sector last October when it agreed to guarantee all deposits of major Irish lenders and foreign banks with a significant Irish presence.
(Additional reporting by Reuters Bureaux across the world; writing by Will Waterman; Editing by Hans Peters)
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