Markets Surge Ahead of US $250 Billion Bank Bailout CREDIT CRUNCH, FINANCIAL CRISIS, GLOBAL ECONOMY, IMF, PAULSON, BUSH, GROUP OF SEVEN, STOCK MARKETS, G7 Reuters | 14 Oct 2008 | 04:33 AM ET
The U.S. Treasury is ready to inject $250 billion into U.S. banks, mirroring moves by other leading countries that have boosted confidence in financial markets and sent the Nikkei soaring 14 percent on Tuesday.
European markets extended the rally, with the stock markets opening up 4.5 percent in London, nearly 4 percent up in Frankfurt and more than 4 percent in Paris.
The U.S. Treasury plan to be detailed on Tuesday could put $125 billion into the top nine U.S. banks alone as part of a capital infusion aimed at getting banks to lend to each other again and easing the turmoil in global markets, a source briefed on the matter said.
Federal Reserve Chairman Ben Bernanke said new measures to shore up the financial system would help restore normality to markets.
"These steps will allow us to restore more normal market functioning, and encourage private capital to further support the reinvigoration of financial markets," Bernanke wrote in the editorial published on the Wall Street Journal's web site.
The move follows pledges of more than 1 trillion euros ($1.36 trillion) by the governments of Britain, Germany, France and other European countries to bolster their banks.
Japan's government also announced a series of steps on Tuesday that could include a law allowing it to inject public funds into regional banks.
Many countries have also moved to reassure savers by guaranteeing bank deposits. South Korean Finance Minister Kang Man-soo was quoted as saying Korea could raise guarantees on deposits and might even guarantee banks' foreign currency debt.
Asian stock markets built on Monday's gains and Japan's Nikkei 225 Average soared 14 percent when the Tokyo market reopened after a holiday, although there were some cautious voices.
"The actual amount (of the U.S. plan) is still a little small, and most of the banks will have to raise $10 billion in matching capital. There's some question about whether they'll be able to do this," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities in Tokyo.
Record Dow Rise
The jump in Asian stocks followed the biggest one-day gain ever in the Dow Jones industrial Average and the S&P 500 index, both up 11 percent on Monday. Wall Street had its worst week in history last week amid panic over collapsing banks and fears that major economies were heading for recession.
"Sometime last week it seemed like we faced Armageddon, so to have a coordinated plan on stabilizing banks is huge progress," Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said.
Stocks worldwide added more than $1.7 trillion in value on Monday, based on a record 9.3 percent gain in the MSCI world equity index.
U.S. officials will announce details of the U.S. plan at 8:30 a.m. ET Tuesday, the Treasury Department said.
After talks with Wall Street bankers on Monday, Treasury Secretary Henry Paulson agreed to taking equity stakes in U.S. banks and to a three-year guarantee of bank-to-bank lending, sources familiar with the meeting said.
The government would take $25 billion in preferred stock in Bank of America , Wells Fargo , Citigroup , JPMorgan Chase , Goldman Sachs , Morgan Stanley and Bank of New York , the sources said.
All except Bank of America would have to raise $10 billion in matching capital to qualify, a source said.
This was an about-face from a previous U.S. focus on buying bad debt from banks, after world finance ministers coalesced around a British proposal at weekend meetings in Washington.
Britain's bank plan called for 37 billion pounds ($64 billion) of taxpayers' cash to bail out three major banks in a move that could make the government their main shareholder.
Also on Monday, investment bank Morgan Stanley reached a financing deal with Japan's Mitsubishi UFJ Financial Group (MUFG), possibly with U.S. government support. Morgan shares soared 87 percent, after losing 58 percent last week and in Tokyo MUFG shares rose 14 percent, hitting their daily limit-high at 810 yen.
Spain's Banco Santander said it would acquire the remaining 75 percent stake in Sovereign Bancorp it does not already own, as the euro zone's biggest bank hunted for bargains in the beaten-down financial sector.
In addition to the bank bailouts, the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank said they would lend commercial banks as much U.S. dollar liquidity as they needed.
That had an instant impact on bank-to-bank lending rates, which eased. The euro gained on the European plans while the yen fell about 0.8 percent from New York to 102.80 per dollar.
The yen is popular in so-called carry trades, when investors sell the low-yielding currency to invest in higher-yielding currencies. When investors get nervous about risk, as in recent months, they unwind such trades.
"The yen had been bought due to risk aversion, but such moves are likely to subside for now," said Hiroshi Yoshida, a currency trader at Shinkin Central Bank.
British Prime Minister Gordon Brown called on world leaders to create a new financial architecture to replace the system set up at a conference in Bretton Woods, New Hampshire, in 1944.
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"Sometimes it does take a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed," Brown said in a speech at the London offices of Thomson Reuters.
"I'm slightly less terrified today than I was on Friday," Princeton University economist Paul Krugman said after he was awarded the Nobel prize for economics on Monday. "We're going to have a recession and perhaps a prolonged one but perhaps not a collapse."
-- CNBC.com contributed to this story Copyright 2008 Reuters. Click for restrictions.
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