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Government takes unprecedented step following worst week on Wall Street
By Kevin G. Hall
McClatchy Newspapers
Published on Saturday, Oct 11, 2008
WASHINGTON: Wrapping up one of the worst weeks in the history of Wall Street, the Treasury Department confirmed Friday evening that it will buy stakes in major U.S. banks and financial institutions.
Treasury Secretary Henry Paulson announced the bold move as officials of the world's leading industrialized democracies agreed to guidelines for joint action but stopped short of taking the coordinated steps sought by investors worldwide.
The revelation that the Treasury will take nonvoting stakes in U.S. banks adds to a growing list of government interventions into private financial institutions not seen since the Great Depression.
The list includes the seizure of mortgage-finance companies Fannie Mae and Freddie Mac, the rescue of global insurer American International Group with an $85 billion loan, emergency lending to several financial firms, and the direct purchase of short-term promissory notes from U.S. corporations to bypass clogged credit markets.
The announcements came after another turbulent day in world financial markets, and after Paulson held an emergency meeting in Washington with the finance ministers and central bank presidents from the Group of Seven: the United States, Canada, the United Kingdom, Germany, France, Italy and Japan.
In a news conference, Paulson said he told the visiting financial leaders how he'll carry out the recently enacted $700 billion U.S. financial rescue package. He revealed that he plans to go beyond purchasing distressed bank assets to take nonvoting stakes in U.S. financial institutions to help recapitalize them.
''We are developing strategies to use the authority to purchase and insure mortgage assets and to purchase equity in financial institutions, as deemed necessary to promote financial market stability,'' Paulson said. He added that the Treasury is working to develop a
standardized approach for a wide array of companies to help them attract private capital as well.
In a joint communique, G-7 finance ministers and central bankers said: ''The current situation calls for urgent and exceptional action. We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth.''
Their five-point plan includes:
• Preventing bank failures.
• Ensuring that credit and money markets return to normal functioning.
• Enabling banks to raise capital from public and private sources.
• Ensuring sufficient insurance of bank deposits.
• Restarting the secondary markets where mortgages and other loans are pooled intobondlike instruments.
''This is a period like none of us have seen before. . . . There were not [questions] on what we needed to do,'' Paulson said, dismissing concerns that global investors wanted to see more immediate G-7 steps taken in unison.
Action would be coordinated where possible, he said, but ''individual countries are going to have different needs and are going to approach the problems differently.''
Coordinated action
Perhaps the statement's most important point was its message to the world that the G-7 powers are committed to coordinated and united action.
Market analysts had stressed that such a stand was necessary to improve global confidence. That's the point Paulson emphasized in a statement following the meeting:
''The G-7 is compelled to robust international partnership and cooperation. Never has it been more essential to find collective solutions to ensure stable and efficient financial markets and restore the health of the world economy,'' Paulson said.
Over the weekend, Paulson will meet with leaders of the world's 20 most important economies — including big emerging markets such as Brazil, Russia, India and China — to seek additional ways of restoring confidence in the financial markets. They're in Washington for meetings of the International Monetary Fund.
The G-7 meeting came at the end of a turbulent week in global financial markets.
In the United States on Friday, the Dow Jones industrial average swung more than 1,000 points in a wild day of trading, the biggest swing in the blue-chip stock index's 112-year history.
The Dow closed down 128 points to 8,451.19, the best daily finish in a dismal week that had the index down more than 18 percent. Before getting to that final number, however, the Dow fell almost 700 points after the opening bell Friday and briefly crossed below 8,000 for the first time in five years.
In a rare bit of good news, some battered bank stocks, including Citigroup and J.P. Morgan Chase, rebounded, preventing even steeper losses in the Dow.
The tech-heavy Nasdaq actually closed up 4.39 points, or 0.27 percent, to 1,649.51. The S&P 500 posted modest losses of 10.70 points, or 1.18 percent, to 899.22. And the Russell 2000, an index of smaller companies, rose 4.6 percent.
Overseas turmoil
The U.S. numbers were tame compared to the turmoil abroad Friday, as investors projected into the future and fretted about a sinking global economy. Japan's Nikkei exchange fell 9.6 percent, losing a quarter of its value this week. Exchanges in Hong Kong and Australia fell 7.2 percent and 8.3, respectively, on Friday.
Asia's turmoil spread to Europe, where London's FTSE exchange was down 8.8 percent and exchanges in Germany and France closed down 7 percent and 7.7 percent, respectively.
Most economists now project a U.S. recession and the possibility of a global one.
President Bush on Friday again spoke to the nation, trying to soothe the nerves of ordinary Americans, who have seen their retirement plans plunge in value and their jobs threatened by the widening financial turbulence.
''We are a prosperous nation with immense resources and a wide range of tools at our disposal. We're using these tools aggressively,'' Bush said.
WASHINGTON: Wrapping up one of the worst weeks in the history of Wall Street, the Treasury Department confirmed Friday evening that it will buy stakes in major U.S. banks and financial institutions.
Get the full article here.
Comments
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Posted 09:30 AM, 10/11/2008
Oh, great, just what this country needs, for the government to own and control more businesses with the very tax money from the backs of Americans when the government could easily take those billions and give it to Americans to invest and spend, and pay off debt with, that would save the banks. So much for the free market.
akron, oh
Posted 10:56 AM, 10/11/2008
Hey since they are buying I could use a steak...
Stow, OH
Posted 11:29 AM, 10/11/2008
What do you suppose the people would have done in 1929 after the crash if they thought the CEO's were walking away with hundreds of millions of dollars like they are now ? Back then the rich lost everything too! Now they are protected by our government .This is why you don't have ex wall street hacks like Paulson running the Treasury .
akron, oh
Posted 01:51 PM, 10/11/2008
Maybe its time for good ole mob justice. Get your pitchforks and torches... We are coming after you CEO's with the golden parachutes..
akron, oh
Posted 02:33 PM, 10/11/2008
Americans cannot have their cake and eat it too. Afterall, the average household carries $8,000 in credit card debt and contributes to American consumers owing 2 trillion in personal debt, (not including mortgages.) That works out to $19,000 per household and bankruptcies doubling in the past decade. Polonius, in Hamlet was right when he warned: "neither a borrower nor a lender, be."
Stow, OH
Posted 03:31 PM, 10/11/2008
Define "American"
The average workers salary has remained stagnant for 10 years ,while the average CEO's salary has risen 400% ! Pay me $17,000 an hour like Fuld from Lehmans Bros. and i promise you i will never touch a credit card again .
akron, oh
Posted 05:10 PM, 10/11/2008
WHY have Cake if you cant eat it?
Just like the rest of your post.. Its just as much nonsense.
Be the time a household had the money to pay for everything In cash.. Not being a borrower....
They would be to old to enjoy it... They would be spending it on the retirement home they are looking into...
akron, oh
Posted 10:26 PM, 10/11/2008
May Fong: It is called living within your means. Or being prudent. Look it up in your Chinese/ English translation guide.
