US partially nationalizes banks

[phongn]

US to take stake in banks, first since Depression

By JEANNINE AVERSA – 6 hours ago

WASHINGTON (AP) — The government will buy an ownership stake in a broad array of American banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said late Friday, announcing the historic step after stock markets jolted still lower around the world despite all efforts to slow the selling stampede.

Separately, the U.S. and the globe's other industrial powers pledged to take "decisive action and use all available tools" to prevent a worldwide economic catastrophe.

"This is a period like none of us has ever seen before," declared Paulson at a rare Friday night news conference. He said the government program to purchase stock in private U.S. financial firms will be open to a broad array of institutions, including banks, in an effort to help them raise desperately needed money.
The administration received the authority to take such direct action in the $700 billion economic rescue bill that Congress passed and President Bush signed last week.

Earlier Friday, stock prices hurtled downward in the United States, Europe and Asia, even as President Bush tried to reassure Americans and the world that the U.S. and other governments were aggressively addressing what has become a near panic.

A sign of how bad things have gotten: A drop of 128 points in the Dow Jones industrials was greeted with sighs of relief after the index had plummeted much further on previous days. The week ended as the Dow's worst ever, with the index down an incredible 40.3 percent since its record close almost exactly one year earlier, on Oct. 9. 2007.

Investors suffered a paper loss of $2.4 trillion for the week, as measured by the Dow Jones Wilshire 5000 index, and for the past year the losses have totaled $8.4 trillion.

It was even worse overseas on Friday. Britain's FTSE index ended below the 4,000 level for the first time in five years; Germany's DAX fell 7 percent and France's CAC-40 finished down 7.7 percent. Japan's benchmark Nikkei 225 index fell 9.6 percent, also hitting a five-year low. For the week, the Nikkei lost nearly a quarter of its value. Russia's market never even opened.

Paulson announced the administration's new effort to prop up banks at the conclusion of discussions among finance officials of the Group of Seven major industrialized countries. That group endorsed the outlines of a sweeping program to combat the worst global credit crisis in decades.

Earlier this week, Britain had moved to pour cash into its troubled banks in exchange for stakes in them — a partial nationalization.

Paulson said the U.S. program would be designed to complement banks' own efforts to raise fresh capital from private sources. The government's stock purchases will be of nonvoting shares so it will not have power to run the companies.

The purchase of stakes in companies would be in addition to the main thrust of the $700 billion rescue effort, which is to purchase distressed assets from financial institutions as a way of unthawing frozen credit, getting banks to resume more normal lending operations and staving off severe problems for businesses and everyday Americans alike.

It would mark the first time the government has taken equity ownership in banks in this manner since a similar program was employed during the Depression.
Paulson and Federal Reserve Chairman Ben Bernanke met with their counterparts from the world's six other richest countries late in the day as the rout of financial markets sped ahead despite earlier dramatic rescue efforts in the U.S. and abroad.

In a statement at the end of that meeting, the G7 officials vowed to protect major banks and to prevent their failure. They also committed to working to get credit flowing more freely again, to support the efforts of banks to raise money from both public and private sources, to bolster deposit insurance and to revive the battered mortgage financing market.

They did not provide specifics beyond that five-point framework.

At the White House earlier in the day, Bush said, "We're in this together and we'll come through this together." He added, "Anxiety can feed anxiety, and that can make it hard to see all that's being done to solve the problem."

He made it clear the United States must work with other countries to battle the worst financial crisis that has jolted the world economy in more than a half-century.

"We've seen that problems in the financial system are not isolated to the United States," he said. "So we're working closely with partners around the world to ensure that our actions are coordinated and effective."

The Dow dropped a little over 100 points while he was speaking.

Fear has tightened its grip on investors worldwide even as the United States and other countries have taken a series of radical actions including an unprecedented, coordinated interest rate cuts by the Federal Reserve and other major central banks.

Besides the United States, the other members of the G7 meeting in Washington are Japan, Germany, Britain, France, Italy and Canada. Finance officials also planned to meet with Bush Saturday at the White House.

"We are in a development where the downward spiral is picking up speed," said Germany's Finance Minister Peer Steinbrueck, who wanted to see an orchestrated response among the G7.

So did French Finance Minister Christine Lagarde, who said a "coordinated, synchronized and rightly timed approach" was needed.

An even larger group of nations — called the G20 — will meet with Paulson on Saturday evening. How the world's finance officials and central bank presidents can better contain the spreading financial crisis also will dominate discussions at the weekend meetings of the 185-nation International Monetary Fund and the World Bank in Washington.

The British, who recently announced a plan to guarantee billions of dollar worth of debt held by major banks, have been pitching that idea to the rest of the G7 members.

The idea behind all these ideas — as well as bold steps previously announced in recent weeks — is to get credit flowing more freely again.

In the United States, hard-pressed banks and investment firms are drawing emergency loans from the Federal Reserve because they can't get money elsewhere. Skittish investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers.

The lending lockup — which is making it harder and more expensive for businesses and ordinary people to borrow money — is threatening to push the United States and the world economy as a whole into a deep and painful recession.

In Europe, governments have moved to protect nervous bank depositors. Germany pledged to guarantee all private bank savings and CDs in the country, and Iceland and Denmark followed suit. Ireland went even further by also guaranteeing Irish banks' debts. The United States will temporarily boost deposit insurance from $100,000 to $250,000 in cases where its banks or savings and loans fail.

The Fed, meanwhile, has repeatedly tapped its Depression-era authority to be a lender of last resort, not only to financial institutions but also to other types of companies. Earlier this week, the Fed said it would buy massive amounts of companies' debts, in another unprecedented effort to break through the credit clog.

Associated Press Writers Harry Dunphy, Desmond Butler, Martin Crutsinger and Deb Reichmann contributed to this report.

[Sea Skimmer]

Hmm… not exactly good or bad news. But say, question for all, I know a recession has a definition, two quarters of negative economic growth, but does a Depression have any similar standard, or is that just a complete play by ear kind of term?

[Gerald Tarrant]

Hmm… not exactly good or bad news. But say, question for all, I know a recession has a definition, two quarters of negative economic growth, but does a Depression have any similar standard, or is that just a complete play by ear kind of term?

More of a play by ear kind of a thing. Depressions are usually referred to as "Severe Recessions" either in terms of duration, or GDP contraction. The National Bureau of Economic Research is generally considered the most authoritative source for classifying recessions in the US, but they don't declare depressions (the only one that they were around for was the Great Depression).

That said, there are some economists who don't like the NBER definition of recession, they tend to focus more on jobless numbers, or comparisons to historical average growth. (Dr. Paul Krugman, who is the economics correspondent for the NY Times, has tended to use other numbers than just GDP growth.) Alternate definitions may turn out to be somewhat better for a few modern case studies; for example Germany's growth over the past decade or so has been weak, and their unemployment has hovered upwards of 8%. The NBER definition wouldn't call this a recession, but it's not stunning economic health either. Similarly, while GDP growth in the US hasn't been negative yet, Jobless numbers have grown to about 6% Link. Whether or not GDP is calculated to have contracted during this period (and hence recession), the employment numbers contradict economic health claims.

[PeZook]

Actually, there are people who consider any long drop in GDP growth to be a recession. IIRC, there is no actual hard definition, what Skimmer gave was just one of many, depending who you ask.

In my classes, we used to call the lowest part of the economic cycle a recession, and if it was particularly bad and with negative growth, it would be a depression. I don't necessarily agree with that, though, I was always in favor of using more indicators than just GDP growth/lack of it. For example, you can easily fake economic growth by inflating the money supply and just not reporting inflation at all, or reporting it dishonestly. Then there's issues of concentration of wealth, overvaluation of certain goods (GDP is dependent on prices, after all), employment, unemployment, breakdown of the economy by sectors and other stuff. But the media (and many politicians...) just follow the GDP religiously...

[RedImperator]

I like the 19th century terminology better: panic. Recession sounds, I dunno, like you're backing your car up, or the tide is going out. What happened this week was raw, 200 proof, shit-your-pants-and-cry panic, and the Panic of 2008 is a far more accurate name for it than whatever it's going to actually end up getting called.

[Stargate Nerd]

Paulson said the U.S. program would be designed to complement banks' own efforts to raise fresh capital from private sources. The government's stock purchases will be of nonvoting shares so it will not have power to run the companies.

You've got to be shitting me.

[ray245]

Well, they are trying to argue that it is considered to be a free market system or policy...and there is no 'real' government intervention.

[aerius]

Pushing on a string. This is going to work just as well as all the previous bailout packages. Which is to say it won't.

Credit isn't flowing because no one trusts each other, and there's no trust because all the financials are lying and committing outright fraud on their balance sheets and asset valuations. Until they cut that shit out, credit will not flow.

[Admiral Valdemar]

The calls for suspending all markets around the globe won't help either. That will simply cause the Mother of All Sell-offs once they open again, just as the shorting ban ending caused such a shock.

While there are people still talking about potentially going into a recession(!), everyone else is either shitting bricks (sadly not gold ingot ones) over the Credit Crunch, or oblivious to it because the real economy hasn't been hit hard yet.

They say that when GM goes down, so too does the US economy, or at least one POTUS said that. I think looking at the news today regarding GM, you'll agree that worrying about the shit hitting the fan is over. It has hit. Now we watch how many heads of state it takes to change an economy, or fiddle while the world burns given the bailing out deal only delays the inevitable.

Revealing all Level 3 assets and everything else on the books so they can be marked-to-market now is mandatory. If the last week hasn't convinced people that fear is driving this engine of chaos, not illiquidity, then I expect they'll enjoy another week of more the same.

[Count Chocula]

Aerius and Valdemar hit the nail right on the head. If I don't trust a neighbor, I won't loan him a fucking garden hose. What we now have in the American financial system is systemic, if not endemic, lies, mendacity and misrepresentation. American investors, and foreign investors, now see that they can not trust anything coming from the companies and funds in which they are so heavily invested, since the crisis has laid the deceit out for all to see.

Without a restoration of trust and accountability, both of which will take time and willingness to do, the economic situation will continue to deteriorate. All the talk of buying into banks, and all the printing of money, is just window dressing. The market (that's us, folks) is reacting emotionally, with good reason. Right now, investors of all stripes are jilted lovers looking at their mate's credit card statement and seeing hotel charges.

[PeZook]

The governent doesn't seem to understand that the stock market is a game of psychology, either. They are constantly trying to assure the public of the wrong things, which wouldbe hilarious if it wasn't so dangerous.

"The government will not try to interfere with the free market! We will give these people lots of money so that The Market can figure this thing on itself! No intervention! We will not interveeeene!!!"

[Uraniun235]

Revealing all Level 3 assets and everything else on the books so they can be marked-to-market now is mandatory. If the last week hasn't convinced people that fear is driving this engine of chaos, not illiquidity, then I expect they'll enjoy another week of more the same.

You really think that at this point the end result will change much between "start marking to market now" and "ride this hog into the ground"? I guess you're more optimistic than I've given you credit for. I thought someone already pointed out that we're basically facing total insolvency no matter what at this point.

[Count Chocula]

Uranium, it's like the difference between being in a plane and losing your engine at night over mountains, and losing your engine at night over a city. In either case you're going down, but at least over the city there's enough light for you to try and pick your landing spot (I picked that metaphor on purpose: way back when, when I lived in Virginia, a Cessna lost its engine at night over Roanoke and landed in a mall parking lot. If he had been 50 miles west of Roanoke, he may well have glided into a granite overcast).

Part of the reason for the credit lockup is that counterparties don't trust each other. At least marking to market will bring a degree of transparency and confidence back into market transactions. If I were a bank or fund manager, I know I'd prefer bad news to no news.

[Vendetta]

If I were a bank or fund manager, I know I'd prefer bad news to no news.

That assumes that you aren't desperately trying to get away with something for as long as possible. Long enough to, for example, resign with a golden handshake rather than havign everything come out and face fraud charges.

[Count Chocula]

Damn, you had to throw in the whole honesty thing! I'd make a piss-poor banker after all...

[Lonestar]

Uranium, it's like the difference between being in a plane and losing your engine at night over mountains, and losing your engine at night over a city. In either case you're going down, but at least over the city there's enough light for you to try and pick your landing spot (I picked that metaphor on purpose: way back when, when I lived in Virginia, a Cessna lost its engine at night over Roanoke and landed in a mall parking lot. If he had been 50 miles west of Roanoke, he may well have glided into a granite overcast).

.

The problem with that is that the uS Economy isn't a Cessna...it's a widebody. That could take out several city blocks as it comes down.

[Admiral Valdemar]

It no longer matters now, the damage is done to the markets. The injection of a couple of trillion over the past week bought us one day of bounce, now it's back down again. Hard. The fear in the markets is unprecedented and easily surpasses the volatility of anything before thanks to the modern age of telecommunications. Paulson's plan has failed spectacularly as he can't force the banks to lend out that money he gave them, which really should have been a clause in the original bill. The past couple of days hailing Brown as the saviour of the global economy are equally amusing, albeit, a little justified given some of the proposals he put forward such as market transparency which everyone else neglected to mention.

Saving the finance sector is redundant if the "real economy", that is, consumers cannot spend. No spending = no economy.

People thought it was all over come the weekend. How to break it to them that this is only just beginning...

[SirNitram]

The acronym-named numbers telling the difference between borrowing from the Fed and borrowing from banks still result in everyone borrowing from the Fed. That sounds familiar. Why does it sound familiar?

"Centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly."

Right, that's why.