Toxic-debt plan, short-selling ban boost markets (Reuters)
20.09.2008 09:35 Finance
The moves capped a week in which financial markets faced their most serious confluence of crises since the Great Depression in the 1930s and threatened national economies and the worldwide banking system.
"It's like having a heart attack, and you go and get your chest cracked open and get it fixed, but the next morning you're still hurting," said Warren Simpson, managing director at Stephens Capital Management in Little Rock, Arkansas.
"This has been a beast of biblical proportions. Nobody has seen anything like it."
Lawmakers promised fast action on the toxic-debt plan, which two banking industry sources put in the $500 billion to $800 billion range. A Treasury spokeswoman declined comment.
As the U.S. government brought out the big guns to tackle the mounting financial crisis, investment bank Morgan Stanley (MS.N) bought itself some time to come up with a plan for its future and continued talking to Wachovia Corp (WB.N) and other banks about a merger.
On Saturday, a U.S. bankruptcy judge approved British bank Barclays Plc's (BARC.L) deal to purchase the core U.S. business of Lehman Brothers Holdings Inc (LEHMQ.PK).
But much of the markets' focus was on Washington, as officials from President George W Bush's administration, Congress and the Federal Reserve worked to craft a number of plans to restore confidence in shaken stock markets.
The U.S. government has pledged more than $1 trillion to prop up the financial system and housing market.
In the most recent example of a government entity stepping in to ease fears, the U.S. Treasury said on Friday it will use $50 billion to back money-market mutual funds whose asset values fall below $1 in another step to contain raging financial turmoil.
"The problems were critical, both in the credit markets and with banks," said Blake Howells, director of equity research at Becker Capital Management in Portland, Oregon.
"The government is trying to stop a domino effect of more institutions failing, and taking others down."
U.S. stocks soared on Friday as the Dow Jones industrial average closed up 368.8 points, or 3.4 percent, at 11,388.4, and the Nasdaq (.IXIC) rose 74.8, or 3.4 percent, to 2,273.9. Other global markets also reacted sharply.
WORKING FOR THE WEEKEND
Government officials said they had more work to do.
"We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses," Treasury Secretary Henry Paulson told a news conference.
"The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy."
Banks worldwide have suffered more than $500 billion of write-downs and loan losses since the global credit crisis began more than a year ago.
The crisis grew more acute this month with government takeovers of mortgage companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N); the bankruptcy of Lehman Brothers Holdings Inc (LEHMQ.PK); Merrill Lynch & Co's (MER.N) shotgun agreement to be bought by Bank of America Corp (BAC.N); and a bailout of insurer AIG (AIG.N).
This came just six months after a government-backed rescue of Bear Stearns Cos.
Government officials have indicated their willingness to do what they can to prevent a major financial institution from going under and roiling the overall markets. A government plan was expected to be sent to Congress this weekend.
"The optimism surrounding the Treasury plan is justified but it should be noted that economic recovery is several quarters ahead. The credit crunch and household balance sheet position will both play a critical role in how soon the economy gathers steam," Asha Bangalore, an economist at Northern Trust in Chicago, said in a note.
The banking issues were not limited to the United States. UK lender HSBC Holdings (HSBA.L) (0005.HK) walked away from a $6.3 billion deal for control of Korea Exchange Bank (004940.KS), fueling speculation it may be turning its attentions to its embattled rivals in the West.
And the Eurozone's largest bank, Spain's Santander (SAN.MC), declined to comment on a media report it was eyeing Bank of Ireland (BKIR.L), which has been pummeled by a property market slump at home.
After Britain's Financial Services Authority (FSA) imposed a four-month ban on short-selling financial stocks on Thursday, the U.S. Securities and Exchange Commission followed suit on Friday with an immediate 10-day ban.
The world's central banks also redoubled their efforts to lubricate the seized-up money markets. Japan, Australia, India and Indonesia pumped in $42 billion after the U.S. Fed coordinated a $180 billion package a day earlier.
TOXIC-DEBT PLAN
Washington's proposal to draw the poison from banks' mortgage assets and the first of the short-selling bans had an immediate and dramatic effect.
President Bush said on Friday government intervention was necessary to solve the problems plaguing the financial markets, calling it a "pivotal moment for America's economy."
"Given the precarious state of today's financial markets and their vital importance to the daily lives of the American people, government intervention is not only warranted, it is essential," he said.
While many on Wall Street cheered the ban on short-selling, the sentiment was not unanimous.
Options traders, who sell stock short to balance their trading positions, were caught off guard, and warned that the measure could paralyze derivatives markets.
The main complaint was that the crackdown was a knee-jerk reaction that will not fix the banking sector's underlying weaknesses -- a pile of bad debts, hard-to-value mortgage securities and a breakdown of investor confidence.
Former Fed Chairman Alan Greenspan called the ban "a terrible idea."
Paulson and current Fed Chairman Ben Bernanke planned to work through the weekend with Congress on a plan to deal with the toxic bank assets that have been choking the financial system for a year.
"This is a more substantial and systemic solution than the ad-hoc interventions we have seen in recent days," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour.
MORGAN STANLEY
Sovereign wealth fund China Investment Corp (CIC), Morgan Stanley's largest shareholder, was said to be in talks to raise its stake to as much as 49 percent from the 9.9 percent position it bought for $5 billion in December, sources familiar with the matter said.
Beijing is wary of adding to its Morgan Stanley holding, given that its existing holding is carried at a steep loss -- the whole bank was only worth $24 billion at Thursday's close.
On Friday morning, a senior CIC official, quoted by the official Xinhua news agency, said Wall Street's two remaining stand-alone investment banks, Morgan Stanley and Goldman Sachs (GS.N), were capable of tackling their problems on their own. Morgan Stanley declined to say whether it was in talks.
A U.S. fund to deal with bad mortgage-related assets would be similar to the Resolution Trust Corp, set up to clean up bad debts from the S&L crisis in the late 1980s.
"We talked about a comprehensive approach that will require legislation to deal with illiquid assets on financial institutions' balance sheets," Paulson told reporters.
According to two Congressional aides, the Treasury head has been shopping around his plan to create the fund.
(Additional reporting by Jonathan Stempel, Kevin Plumberg, Dan Wilchins, Kristina Cooke, Jeff Mason and Lucia Mutikani; Writing by Tony Munroe and Will Waterman; Editing by Gary Hill and Anshuman Daga)
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