White House ponders ownership stakes in banks

News that the Bush administration is considering taking ownership stakes in a number of U.S. banks helped restore a relative calm over global financial markets Thursday.

The aim of such a move would be to thaw the lending freeze that threatens to push the world's economy into recession. It comes after rampant fear about the global economy sent investors scurrying on Tuesday for safety in U.S. government securities despite an orchestrated round of rate cuts by the world's central banks.

Investors also were hoping that selling, which gave the Dow its ninth straight day of losses, was overdone.

An administration official, who spoke late Tuesday on condition of anonymity because no decision has been made, said the $700 billion rescue package passed by Congress last week allows the Treasury Department to inject fresh capital into financial institutions and get ownership shares in return.

Create a More Connected Minnesota

MPR News is your trusted resource for the news you need. With your support, MPR News brings accessible, courageous journalism and authentic conversation to everyone - free of paywalls and barriers. Your gift makes a difference.

Treasury Secretary Henry Paulson told reporters that Treasury was moving quickly to implement the $700 billion rescue effort and he specifically mentioned reviewing ways to bolster the capital of banks.

"We will use all the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size," Paulson said at a Wednesday news conference.

His statements came on the heels of Britain's move to pour cash into troubled banks in exchange for stakes in them - a partial nationalization.

Asked whether he would try something like the British plan, Paulson said: "We have a broad range of authorities and tools. ... We've emphasized the purchase of liquid assets, but we have a broad range of authorities. And I'm confident we have the authorities we need to work with going forward."

The Federal Reserve on Wednesday cut its target for the benchmark rate on overnight loans between banks to 1.5 percent. The cut from 2 percent took the rate to its lowest level in more than four years.

In an unprecedented coordinated move, central banks in England, China, Canada, Sweden and Switzerland and the European Central Bank also cut rates after a series of high-stakes phone calls over several days between Fed Chairman Ben Bernanke and his counterparts.

The Fed acted in concert with the European Central Bank to make emergency interest rate cuts after the Sept. 11 terror attacks in 2001. But Wednesday's cuts were unique in the number of nations that participated, the Fed said.

On Thursday, rates in South Korea, Hong Kong and Taiwan were also trimmed and Asian markets appeared to find their feet after a brutal round of selling Wednesday.

In Tokyo, the benchmark Nikkei 225 index ended morning trading up 1.25 percent, a day after it plummeted 9.4 percent in its biggest one-day drop in 21-years. Hong Kong's Hang Seng Index gained 1.2 percent following the interest rate cut, while China's benchmark Shanghai Composite Index had gained 0.8 percent by late morning.

European markets on Thursday recovered some of Wednesday's hefty losses after Asia's relatively steady performance.

But all eyes are on now on Wall Street, where investors hope markets are getting closer to finding a bottom after the worst five-day rout since 1987. On Wednesday, the Dow gave up 189 points to close at - and is now down about 35 percent from its high of 14,164.53 reached exactly one year ago.

The move back into stocks Thursday siphoned money away from safe haven investments like government bonds and gold.

Demand for short-term Treasurys waned, with the yield on the three-month Treasury bill, which moves opposite its price, rising to 0.69 percent from 0.63 percent late Wednesday. Longer term debt also fell, with the yield on the 10-year note rising to 3.74 percent from 3.65 percent late Wednesday.

For millions of Americans, the Fed's cut means borrowing money becomes cheaper. Home equity loans, credit cards and other floating-rate loans all fluctuate depending on what the Fed does.

Bank of America, Wells Fargo and other banks cut their prime rate by half a point to 4.5 percent, also the lowest in more than four years, after the Fed announced its decision early Wednesday.

Fed watchers believe the central bank might cut rates further when it meets later this month, and perhaps again in December, in hopes of cushioning the blow if the United States falls into recession.

Even the coordinated action may not break the panicky mindset that has gripped investors across the world as jobs evaporate and retirement savings dry up. Banks may still be inclined to hoard cash, and until they decide to lend again the crisis is not likely to let up.

If anyone needed evidence, major American retailers turned in dismal sales figures for the third quarter - further proof that consumer spending, the lifeblood of the economy, is sputtering.

The government reported Thursday that jobless claims fell by 20,000 to 478,000 last week, within economists' expectations. The claims still remain at elevated levels due to the struggling economy, though.

The Fed's interest rate cut was a change in course. It had held rates steady because of inflation concerns. Since the Fed had put a stop to interest-rate cuts in June, the economic outlook has deteriorated.

"The pace of economic activity has slowed markedly in recent months," the Fed said. "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

Although inflation has been running higher, the Fed believes the recent drop in prices for oil and gas, and the weaker prospects for economic activity, have reduced the threat it poses to the economy.

The credit markets, which have been remarkably tight for weeks, showed only small signs of loosening. Rates on commercial paper, the short-term debt companies issue to raise cash for everyday expenses, went down. But the rate banks charge each other for loans went up.

The Fed also reduced its emergency lending rate to banks by half a percentage point, to 1.75 percent. Given the intense credit crisis, banks have been borrowing more under what is known as the discount window.

---

Associated Press writers Joe Bel Bruno and Anne D'Innocenzio in New York, Christopher S. Rugaber in Washington and Pan Pylas in London contributed to this report.

(Copyright 2008 by The Associated Press. All Rights Reserved.)