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Tuesday, 14 October 2008
U.S. Prepares $250 billion Bank Bailout
The Treasury could pump $250 billion into U.S. banks in what Federal Reserve Chairman Ben Bernanke called on Tuesday a comprehensive attempt to end the credit crisis, restoring market confidence and sending Tokyo stocks up 14 percent. PDF
TOKYO (Reuters) - The Treasury could pump $250 billion into U.S. banks in what Federal Reserve Chairman Ben Bernanke called on Tuesday a comprehensive attempt to end the credit crisis, restoring market confidence and sending Tokyo stocks up 14 percent.
Japan, which forced its big banks to write off billions of dollars in bad loans earlier this decade with state help, said it could inject public funds into regional banks to make sure that small firms facing a credit crunch can find cash.
The Treasury is due to unveil its plan at 8:30 a.m. EDT, with about half of the total figure likely to go to the top nine U.S. banks alone as part of a capital infusion aimed at getting banks to lend to each other again, people familiar with the plan said.
Fed Chairman Bernanke said in an article published on the Wall Street Journal’s website that the measures, which he did not detail, constituted a broad-based attempt to end the crisis.
“These steps will allow us to restore more normal market functioning and encourage private capital to further support the reinvigoration of financial markets,” he wrote.
The U.S. move follows pledges of more than 1 trillion euros ($1.36 trillion) by Britain, Germany, France and other European countries to bolster their banks.
Many countries have also taken action 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.
In response to the global moves, Japan’s Nikkei soared 13.8 percent when Tokyo reopened after a holiday and MSCI’s index of Asia-Pacific stocks outside Japan rose nearly 7 percent after hitting its lowest since December 2004 on Friday.
There were some cautious voices among the euphoria.
“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.
“Investors are peeping out of their bomb shelters,” said Sean Callow, currency strategist at Westpac.
After talks with Wall Street bankers on Monday, Treasury Secretary Henry Paulson agreed to taking the equity stakes in U.S. banks and to a three-year guarantee of bank-to-bank lending, sources familiar with the meeting said.
According to some sources, 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.
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 Inc (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 Inc it did not already own, as the euro zone’s biggest bank hunted for bargains in the beaten-down financial sector.
SIGHS OF RELIEF
In addition to the bank bailouts, the 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.
The relief was palpable in money markets and dollar deposit rates dropped sharply in Asia.
In Kuala Lumpur, for example, a trader said the overnight rate for dollars had fallen to 2-2.5 percent, higher than the Federal Reserve’s 1.5 percent target but far below the 10 percent level seen at the height of the financial upheaval that followed the collapse of U.S. bank Lehman Brothers.
U.S. Treasury bonds, seen as the best bet when equities were falling in recent weeks, slumped on Tuesday. Benchmark 10-year notes dropped 1-9/32 in price to yield 4.036 percent in Asian trade versus 3.874 percent on Friday. The U.S. market was closed for a holiday on Monday.
“Stock markets now have the reasons for a sustained bounce, and Treasuries are likely to be pressured accordingly,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC.
The euro gained on the European plans while the yen fell, indicating some investors were willing to take on more risk, selling the yen for higher-yielding currencies.
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.
“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 on Monday.
“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.”
(Reporting by Reuters bureaus around the world; Writing by Alan Raybould; Editing by Tomasz Janowski)
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U.S. Prepares $250 billion Bank Bailout
By Elaine Lies and Aiko Hayashi
14 October 2008
TOKYO (Reuters) - The Treasury could pump $250 billion into U.S. banks in what Federal Reserve Chairman Ben Bernanke called on Tuesday a comprehensive attempt to end the credit crisis, restoring market confidence and sending Tokyo stocks up 14 percent.
Japan, which forced its big banks to write off billions of dollars in bad loans earlier this decade with state help, said it could inject public funds into regional banks to make sure that small firms facing a credit crunch can find cash.
The Treasury is due to unveil its plan at 8:30 a.m. EDT, with about half of the total figure likely to go to the top nine U.S. banks alone as part of a capital infusion aimed at getting banks to lend to each other again, people familiar with the plan said.
Fed Chairman Bernanke said in an article published on the Wall Street Journal’s website that the measures, which he did not detail, constituted a broad-based attempt to end the crisis.
“These steps will allow us to restore more normal market functioning and encourage private capital to further support the reinvigoration of financial markets,” he wrote.
The U.S. move follows pledges of more than 1 trillion euros ($1.36 trillion) by Britain, Germany, France and other European countries to bolster their banks.
Many countries have also taken action 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.
In response to the global moves, Japan’s Nikkei soared 13.8 percent when Tokyo reopened after a holiday and MSCI’s index of Asia-Pacific stocks outside Japan rose nearly 7 percent after hitting its lowest since December 2004 on Friday.
There were some cautious voices among the euphoria.
“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.
“Investors are peeping out of their bomb shelters,” said Sean Callow, currency strategist at Westpac.
After talks with Wall Street bankers on Monday, Treasury Secretary Henry Paulson agreed to taking the equity stakes in U.S. banks and to a three-year guarantee of bank-to-bank lending, sources familiar with the meeting said.
According to some sources, 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.
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 Inc (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 Inc it did not already own, as the euro zone’s biggest bank hunted for bargains in the beaten-down financial sector.
SIGHS OF RELIEF
In addition to the bank bailouts, the 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.
The relief was palpable in money markets and dollar deposit rates dropped sharply in Asia.
In Kuala Lumpur, for example, a trader said the overnight rate for dollars had fallen to 2-2.5 percent, higher than the Federal Reserve’s 1.5 percent target but far below the 10 percent level seen at the height of the financial upheaval that followed the collapse of U.S. bank Lehman Brothers.
U.S. Treasury bonds, seen as the best bet when equities were falling in recent weeks, slumped on Tuesday. Benchmark 10-year notes dropped 1-9/32 in price to yield 4.036 percent in Asian trade versus 3.874 percent on Friday. The U.S. market was closed for a holiday on Monday.
“Stock markets now have the reasons for a sustained bounce, and Treasuries are likely to be pressured accordingly,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC.
The euro gained on the European plans while the yen fell, indicating some investors were willing to take on more risk, selling the yen for higher-yielding currencies.
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.
“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 on Monday.
“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.”
(Reporting by Reuters bureaus around the world; Writing by Alan Raybould; Editing by Tomasz Janowski)
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