Saturday, October 11, 2008

U.S. to Purchase Stake in U.S. Banks; NASDAQ Higher, Dow and S&P Lower; G7 and G20 Meetings

The government will buy an ownership stake in a broad array of American banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said late Friday, announcing the historic step after stock markets jolted still lower around the world despite all efforts to slow the selling stampede.

Separately, the U.S. and the globe's other industrial powers pledged to take "decisive action and use all available tools" to prevent a worldwide economic catastrophe.

"This is a period like none of us has ever seen before," declared Paulson at a rare Friday night news conference. He said the government program to purchase stock in private U.S. financial firms will be open to a broad array of institutions, including banks, in an effort to help them raise desperately needed money.

The administration received the authority to take such direct action in the $700 billion economic rescue bill that Congress passed and President Bush signed last week.

Earlier Friday, the Dow and S&P 500 finished down, but the NASDAQ finished up after a tumultuous day in the market. The Russell 2000 (small cap index) finished hiher by more than 2%. It was even worse overseas on Friday. President Bush tried to reassure Americans and the world that the U.S. and other governments were aggressively addressing what has become a near panic.

Paulson announced the administration's new effort to prop up banks at the conclusion of discussions among finance officials of the Group of Seven major industrialized countries. That group endorsed the outlines of a sweeping program to combat the worst global credit crisis in decades.

Earlier this week, Britain had moved to pour cash into its troubled banks in exchange for stakes in them — a partial nationalization. Paulson said the U.S. program would be designed to complement banks' own efforts to raise fresh capital from private sources. The government's stock purchases will be of nonvoting shares so it will not have power to run the companies.

The purchase of stakes in companies would be in addition to the main thrust of the $700 billion rescue effort, which is to buy bad mortgages and other distressed assets from financial institutions. The aim is to unthaw frozen credit, get banks to resume more normal lending operations and stave off severe problems for businesses and everyday Americans alike.

It would mark the first time the government has taken equity ownership in banks in this manner since a similar program was employed during the Depression.

Paulson and Federal Reserve Chairman Ben Bernanke met with their counterparts from the world's six other richest countries late in the day. In a statement at the end of that meeting, the G7 officials vowed to protect major banks and to prevent their failure. They also committed to working to get credit flowing more freely again, to support the efforts of banks to raise money from both public and private sources, to bolster deposit insurance and to revive the battered mortgage financing market. They did not provide specifics beyond that five-point framework.

At the White House earlier in the day, Bush said, "We're in this together and we'll come through this together." He added, "Anxiety can feed anxiety, and that can make it hard to see all that's being done to solve the problem."

He made it clear the United States must work with other countries to battle the worst financial crisis that has jolted the world economy in more than a half-century.

"We've seen that problems in the financial system are not isolated to the United States," he said. "So we're working closely with partners around the world to ensure that our actions are coordinated and effective." The unprecedented moves will take time to start working with Bush, Paulson, Bernanke, and others preaching some patience.

Fear has tightened its grip on investors worldwide even as the United States and other countries have taken a series of radical actions including an unprecedented, coordinated interest rate cuts by the Federal Reserve and other major central banks.

Besides the United States, the other members of the G7 meeting in Washington are Japan, Germany, Britain, France, Italy and Canada. Finance officials also planned to meet with Bush Saturday at the White House.

Germany's Finance Minister Peer Steinbrueck wanted to see an orchestrated response among the G7. So does French Finance Minister Christine Lagarde, who said a "coordinated, synchronized and rightly timed approach" was needed.

An even larger group of nations — called the G20 — will meet with Paulson on Saturday evening.

The British, who recently announced a plan to guarantee billions of dollar worth of debt held by major banks, have been pitching that idea to the rest of the G7 members.

The idea behind all these ideas — as well as bold steps previously announced in recent weeks — is to get credit flowing more freely again.

In the United States, hard-pressed banks and investment firms are drawing emergency loans from the Federal Reserve because they can't get money elsewhere. Skittish investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers.

In Europe, governments have moved to protect nervous bank depositors. Germany pledged to guarantee all private bank savings and CDs in the country, and Iceland and Denmark followed suit. Ireland went even further by also guaranteeing Irish banks' debts. The United States has temporarily boosted deposit insurance from $100,000 to $250,000 in cases where its banks or savings and loans fail.

The Fed, meanwhile, has repeatedly tapped its Depression-era authority to be a lender of last resort, not only to financial institutions but also to other types of companies. Earlier this week, the Fed said it would buy massive amounts of companies' debts, in another unprecedented effort to break through the credit clog.

We shall see what additional information comes out of the G7 and G20 meetings over the weekend.

Sources: AP, Reuters

1 comment:

Jamie Turner said...

Hi, Rollins Team --

You're still the best financial blog on the web.

Question -- I did a little homework comparing today's problems with the Great Depression.

I found some statistics that point out that today's problems aren't anywhere near as bad as the Great Depression.

I was wondering if you guys could do a little homework and confirm this data for your loyal readers in an upcoming post. I think the data below falls within your generally well-founded point-of-view that the current panic is based on emotion, not logic.

Here's what I found:

* For 1932, GNP fell a record 13.4 percent; unemployment rose to 23.6 percent.

* Industrial stocks lost 80 percent of their value between 1930 and 1932.

* 10,000 banks failed between 1929 and 1932, or 40 percent of the 1929 total.

* GNP has also fell 31 percent since 1929.

* Over 13 million Americans lost their jobs between 1929 and 1932.

If you guys could use this data -- or data that you find -- to let everyone know that things aren't nearly as bad as they were in the Great Depression, that would be great!

Jamie Turner