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by Patrick Rizzo,
Jeannine Aversa and Martin Crutsinger
9/18/08
WASHINGTON - The
stock market finally found reason to rally Thursday, and Congress
promised quick action as the Bush administration prepared a plan to
rescue banks from the bad debt at the heart of the worst crisis on Wall
Street since the Great Depression.
Details of the plan
were still being worked out, but Treasury Secretary Henry Paulson
emerged from a nighttime meeting on Capitol Hill to say he hoped to have
a solution "aimed right at the heart of this problem."
As word of a
government plan began to reach Wall Street earlier in the day, the Dow
Jones industrial average jumped 410 points, its biggest percentage gain
in nearly six years.
The rebound also
came after an infusion of billions of dollars by the Federal Reserve and
world governments aimed at getting nervous banks
to stop hoarding money and lend again.
Stocks had
fluctuated throughout the day, without severe swings in either
direction, until CNBC reported the administration might back a new
agency to take bad assets off the books of struggling financial
institutions, much like it did in the aftermath of the savings and
loan crisis of the 1980s.
After the
discussions Thursday night, Paulson said the goal was to come up with
a "comprehensive approach that will require legislation" to deal with
the bad debts, or illiquid assets, on bank's balance sheets. He did
not provide any details, but the plan taking shape called for Congress
to give the administration the power to buy
distressed bank assets.
Rep. Barney Frank,
D-Mass., chairman of the House Financial Services Committee, said that
probably would not mean creating a new government agency.
"It will be the
power — it may not be a new entity. It will be the power to buy up
illiquid assets," Frank said. "There is this concern that if you had
to wait to set up an entity, it could take too long."
Frank said his
committee could begin drafting legislation as early as Wednesday.
Paulson, Fed
Chairman Ben Bernanke and other officials planned to work through the
weekend on a solution. House Speaker Nancy Pelosi said that once the
administration had presented its proposal, "we hope to move very
quickly" to come to an agreement.
There was no
immediate word how much the rescue plan might cost.
The banks still
standing are staggering under the weight of billions of dollars of bad
loans and mortgage debt arising from the wave of home foreclosures in
the United States, and lending has tightened around the world in
response.
Before the sun
rose on Wall Street on Thursday, the Fed said it would boost by as much
as $180 billion the amount of cash it would supply to foreign
counterparts that are short on dollars. For banks in the United States,
the Fed supplied $105 billion in short-term loans later in the day.
But, at least
initially, those efforts did little to unfreeze the global credit
markets. Banks remained extremely reluctant to lend money.
The No. 2
official at the International Monetary Fund, John Lipsky, said the past
few days were "searing manifestations of a financial crisis that has
expanded to historic proportions." He predicted the turbulence would
continue for "some time to come."
British financial
regulators also banned short-selling the stock of financial companies
listed on the London Stock Exchange. U.S. regulators tightened rules on
short-selling Wednesday.
Christopher Cox,
chairman of the securities and Exchange Commission, told lawmakers
the SEC may put in a temporary emergency ban on all short-selling —
not just the aggressive forms it already has targeted, according to a
person familiar with the matter, speaking on condition of anonymity
because no final decision had been made.
The ban might apply
to stocks of selected financial companies, to all financial companies or
even possibly to all public companies. Short-selling, which has been
practiced on Wall Street for decades, is not illegal per se.
The Fed said it
had authorized the expansion of swap lines, the process by which it
supplies reserves to other central banks, to include amounts up to $110
billion for the European Central Bank and up to $27 billion for the
Swiss National Bank.
The Fed also said
new swap facilities had been authorized with the Bank of Japan for as
much as $60 billion, $40 billion for the Bank of England and $10 billion
for the Bank of Canada.
For more than a
year, investors around the world have watched with growing alarm as the
U.S. economy, the world's largest, has struggled to right itself amid
massive home foreclosures, many of them from mortgages issued to
homeowners with bad credit.
The turmoil has
swallowed some of the most storied names on Wall Street. Three of its
five major investment banks — Bear Stearns, Lehman Brothers and Merrill
Lynch — have either gone out of business or been driven into the arms of
another bank.
The Dow's gain of
nearly 4 percent on Thursday sent the average back above 11,000 and
nearly erased its losses from a day before.
But as the
uncertainty wore on, investors continued to flock to Treasury
securities, considered a haven in times of crisis, and the price of
gold rose yet again. And worries about even the safest investments
intensified as Putnam Investments abruptly closed a $15 billion money
market fund because institutional investors had pulled their cash.
Bush canceled
out-of-town fundraising trips to Alabama and Florida to stay in
Washington and huddle with Paulson and the heads of the Fed and the
Securities and Exchange Commission.
In an appearance
earlier in the day, the president acknowledged "serious challenges" in
the markets and said: "The American people can be sure we will continue
to act to strengthen and stabilize our financial markets and improve
investor confidence."
The credit
troubles reverberated around the globe. Asian stocks closed lower.
European stocks rose but struggled to hold on to the gains. Russia
closed its stock exchanges for a second day, and President Dmitry
Medvedev pledged a $20 billion injection into financial markets.
In the United
States, investors worried for another day about the health of the banks
still standing. Earlier in the week, venerable Lehman Brothers was
forced into bankruptcy, and Merrill Lynch was driven into the arms of
Bank of America.
On Thursday, Morgan
Stanley scrambled to strike a major deal or raise more cash that will
reassure investors and prevent more damage to its battered stock. Its
CEO, John Mack, reached out to China's Citic Group overnight about a
possible investment, according to a person familiar with the talks.
Morgan Stanley is
also considering a combination with retail bank Wachovia Corp. and an
investment from Singapore Investment Corp., one of the world's biggest
sovereign wealth funds, said the person, who spoke on the condition of
anonymity because the discussions were still ongoing.
On Capitol Hill,
lawmakers in both parties became increasingly vocal about their concerns
with the Bush administration's handling of the current crisis.
Administration
officials refused to attend a closed-door briefing with House
Republicans this morning, leaving their congressional allies in the dark
about the government's $85 billion emergency loan to insurer American
International Group, House GOP leader John A. Boehner said.
And Sen. Chris
Dodd, D-Conn., the Banking Committee chairman, was irritated that
Paulson twice canceled appearances he was to have made before the panel
this week.
___
Associated Press
writers Catrina Stewart in Moscow, Matt Moore in Frankfurt, Ellen Simon
in New York and Chris Rugaber, Deb Riechmann, Julie Hirschfeld Davis,
Andrew Taylor and Marcy Gordon in Washington contributed to this report.
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