Public Bank Bailouts Boost Markets
Many of the world's biggest stock markets rose strongly Monday, boosted by a strong opening on Wall Street thanks to hopes that widespread government efforts to shore up the world's battered financial system will break the logjam in credit markets.
Markets have responded positively to a raft of measures already announced in Europe Monday and to expectations that the U.S. government will join Britain and other countries in buying ownership stakes in troubled banks to get lending markets restarted and help keep the wider economy moving.
The Dow Jones industrials gained more than 900 points in a stunning rebound from days of big losses. The Dow pushed Europe's markets, which were already gaining ground, even higher. Germany's DAX was 375.99 points, or 8.3 percent, higher at 4,920.30, while France's CAC-40 was up 204.08 points, or 6.4 percent, at 3,380.57.
Britain's FTSE 100 was 170.08 points, or 4.3 percent, higher at 4,102.14, despite some hefty falls in the banks that have accepted government help. The strong showing follows sharp falls in stock indexes worldwide last week, and as interbank interest rates remain abnormally high.
"The events in the financial markets last week were cataclysmic and prompted the unprecedented action by governments," said Neil Mackinnon, chief economist at ECU Group.
"The markets have responded positively but there is still a risk of a one day wonder and tomorrow we'll come down to earth with a bump," he added.
The latest coordinated move emerged before European trading began when top central banks - including the U.S. Federal Reserve and the European Central Bank - unveiled new measures to thaw frozen credit markets and bolster funding to banks. They joined the Bank of England and the Swiss National Bank in saying they would provide unlimited U.S. dollar funds to financial institutions. The Bank of Japan said it was considering similar measures.
The banks' action came after leaders of the 15 countries using the euro said Sunday they would guarantee new bank debt until the end of 2009, allow governments to help banks by buying preferred shares, and vowed to rescue important failing banks through emergency recapitalizion.
In England, if a week is a long time in politics, this one's been an eternity for British Prime Minister Gordon Brown, who's gone from being the man without a plan to the man whose plan everybody is now following, reports CBS News correspondent Mark Phillips.
"The fact that Europe may well adopt the Gordon Brown plan for semi-nationalization of banks and that Henry Paulson may do the same, certainly stabilized markets this morning," says British journalist David Buik, who has written extensively on world markets.
"We must in an uncertain, unstable world, be the rock of stability," Brown said.
No one has ever accused Gordon Brown of unnecessary charisma, but his dour Scottish, no nonsense manner - and a lot of money - has produced the first break in the cloud of doom that has enveloped London's financial center and others around the world, reports Phillips. Brown's plan isn't just a bailout - it's a buyout.
For an investment of $63 billion, British taxpayers now have interests - in one case a majority interest - in three of the country's largest banks, reports Phillips.
And this new political clout in the banking world comes at a price - for the bankers. One condition of the government putting massive sums into banks was that four of their top executives be fired - without bonuses. In fact, all bonuses and dividends for senior executives have been frozen for now. It's a new world with new rules.
Meanwhile, the German government has since put together a rescue package worth as much as $671 billion to shore up the country's financial system, while France's will provide up to $491 billion to help banks stay afloat through the financial crisis.
In Britain, which doesn't use the euro, the government confirmed Monday that it is injecting a total of $63 billion into three leading banks - Royal Bank of Scotland PLC, Lloyds TSB PLC and HBOS PLC - in return for equity stakes. Taxpayers will own about 60 percent of RBS and 40 percent of the merged Lloyds TSB and HBOS. The merger has been renegotiated Monday too, so the amount of Lloyds TSB shares that HBOS shareholders will receive is lower.
The key is whether the flurry of activity can actually ease conditions in the credit markets. Despite the coordinated interest rate reductions announced last Wednesday, and massive liquidity boosts, the rates at which banks lend to each other continued to rise. That means banks were afraid to lend to each other, and raises the chance that they and other businesses won't get the credit they need to operate.
The London interbank offered rate, or Libor, for three-month dollar loans fell 0.07 percent to 4.75 percent, while the similar rate in euros, or Euribor, dipped only 0.063 to 5.318 percent. The rate remains well above the euro zone's benchmark rate of 3.75 percent set by the ECB, meaning the credit freeze is far over. Usually Euribor is much closer to the ECB rate.
"Even with the guarantees now on offer from the European heads of state and despite some easing over the next few days and weeks we should not expect any sharp falls in the interbank rate yet," said Howard Wheeldon, senior strategist at BGC Partners.
In the U.S., the Bush administration said Monday it is moving quickly to implement its own $700 billion rescue program, including consulting with private law firms on how to buy ownership shares in banks to help thaw frozen lending and get the economy moving again.
CBS News correspondent Thalia Assuras reported that experts say the process of purchasing bank stocks is much faster and more efficient than just buying up the bad debt. And speed is of the essence.
"If you buy preferred shares you can put the money in quickly," says economist Peter Morici. "You leave the process of working out the loans to the banks and, frankly, they understand that much better than the government of anyone the government would hire in New York City to do it."
"We did this during the Great Depression," Morici continues. "We are in that kind of crisis. So in my mind we should first of all recognize that the government is not nationalizing the banks and, second of all, that this is a required step to unlock credit markets."
The actions by Europe and the U.S. are having a positive impact all round the world, with Brazil's Ibovespa stock index up 7.7 percent shortly after opening.
Earlier Asian markets set the tone for the day with Hong Kong's Hang Seng Index, which tumbled more than 7 percent Friday, soared 1,515.29 points, or 10.24 percent, to finish at 16,312.16. Australian and Singapore indices jumped more than 5 percent, while South Korean and Chinese benchmarks added around 3.7 percent.
Elsewhere in Asia, Indonesia's key index, down sharply in early trade, gained 0.9 percent after the lifting of a trading suspension, imposed last Wednesday amid a freefall in share prices. The upswing followed government measures to free up liquidity, including easing regulations for share buybacks and corporate financial reserve limits.
In Japan, where the Nikkei 225 tanked nearly 10 percent Friday to close out its worst week in history, trading was closed for a public holiday.
Oil prices rose, with light, sweet crude for November delivery up $2.87 at $80.57. The contract fell Friday $8.89 to $77.70, the lowest price since Sept. 10, 2007.
The euro was steady above $1.36, having rallied strongly during the day, following the European measures, while the U.S. dollar recovered back above 100 yen.