Wednesday, October 15, 2008

Bank Stocks Soar; Markets Fall; Oil & Gasoline Drop

Bank stocks soared on Tuesday after the government set plans to inject $250 billion into the battered sector, where exposure to toxic mortgages and other debt has pummeled investor confidence and share prices.

Nine major lenders agreed to accept the preferred stock investments, which are limited to $25 billion per lender. The injections come as regulators worldwide scramble to unfreeze a financial system.

The 24-member KBW Bank Index rose as much as 13.6% and finished up 12.09%. Credit spreads on lenders' debt also tightened, suggesting that investors perceive less risk of default.

Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, and Bank of New York Mellon are among the nine lenders to receive injections, people familiar with the plan said. Merrill Lynch & Co, which Bank of America is buying, and State Street Corp are also included, according to media reports.

"In recent weeks, the American people have felt the effects of a frozen financial system," U.S. Treasury Secretary Henry Paulson said at a news conference. "Today's actions are not what we ever wanted to do, but today's actions are what we must do to restore confidence to our financial system."

Funds will come from the $700 billion taxpayer-funded bailout package that President George W. Bush signed into law earlier this month.

Fueling the Financial System

"Hopefully, this strong approach is the dynamite needed to blast through the clogged-up financial system," said Sen. Chuck Schumer, a New York Democrat. New York is home to six of the nine initial recipients of the capital injections.

Separately, the Federal Reserve set plans to begin buying large amounts of short-term debt starting on October 27.

The Federal Deposit Insurance Corp (FDIC), meanwhile, said it will guarantee through June 30, 2012, new senior unsecured debt issued on or before June 30, 2009, and also back non-interest bearing deposit accounts that businesses typically use.

Regulators in Europe have pledged more than 1 trillion euros ($1.37 trillion) in direct capital injections for banks on that continent, and to help underwrite lending.

"We will be looking today to an absolute sea change in the global financial system in terms of liquidity," Stephen Schwarzman, chief executive of the private equity firm Blackstone Group, said at a Dubai investor conference.

Moody's Investors Service analysts Gregory Bauer and Robert Young said the $250 billion is equal to about one-fourth of all equity capital of the U.S. banking system. "This is a massive amount of fresh capital that now is reliably available to restore the health of the firms' balance sheets," they wrote.

Citigroup analysts, meanwhile, raised ratings for 14 U.S. banks to "buy" from either "hold" or "sell."

The capital injections do not free banks from problems tied to mortgages, consumer and business credit, and illiquid debt expected to persist well into 2009 or longer.

Analysts expect JPMorgan and Wells Fargo to report lower third-quarter results on Wednesday. Most major U.S. lenders are scheduled to report quarterly results by the end of next week.


A day after the Dow leaped 936.42 points in its biggest one-day point gain ever, investors looked past the U.S. pledge to pour $250 billion into major banks and instead focused on the outlook for earnings and the economy.

The Dow was down 76.62 points (0.82%). The S&P 500 Index was down 5.34 points (0.53%). The Nasdaq was down 65.24 points (3.54%).

Oil & Gasoline

Energy and materials companies fell as the price of oil slid on worries that a recession would curb the demand for oil and other commodities. U.S. crude oil futures fell $2.56 or 3.15%, to settle at $78.63 a barrel on the NYMEX. The average price for a gallon of gasoline is now $3.15.

Trading Volume

Trading was moderate on the NYSE, with about 1.88 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.89 billion shares traded, above last year's daily average of 2.17 billion.

Sources: Reuters, AP

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