U.S. to Buy Stakes in Banks to Help Free Credit

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By GRAHAM BOWLEY and DAVID JOLLY

The Treasury secretary Henry M. Paulson Jr. said Friday that the government would move ahead with a plan to take equity stakes in financial institutions as it tried to restore confidence in the financial system.

Mr. Paulson’s comments came shortly after the finance heads of the world’s major economies promised to work together to ease the global financial crisis that had roiled the markets for the last week.

“We are developing strategies to use the authority to purchase and insure mortgage assets and to purchase equity in financial institutions, as deemed necessary to promote financial market stability,” Mr. Paulson said in a news conference.

The administration had floated the idea of taking the bank stakes earlier this week after having tried without success to unlock frozen credit markets. The hopes is that taking ownership stakes in many United States banks would help restore confidence in the financial system.

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

“Consistent with the legislation,” Mr. Paulson said, “any equity the government purchases through a broadly available equity program would be on a non-voting basis, except with respect to the market standard terms to protect our rights as investors.”

Before Mr. Paulson’s comments, finance officials from the world’s top economic powers endorsed a plan that called for urgent action to solve the credit crisis. Under the plan, the countries vowed to protect major banks and to prevent their failure. They also committed to working to get credit flowing more freely again, support efforts by banks to raise money, bolster deposit insurance and revive the battered mortgage financing market.

Specifically, the group said that it wanted to “ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.”

The statement said that the actions “should be taken in ways that protect taxpayers and avoid potentially damaging effects on other countries,” and added that it strongly support the crucial role of the International Monetary Fund in “assisting countries affected by this turmoil.”

In the statement, the finance leader they would use all of the tools available to prevent systemically important institutions from failure and ensuring that banks can raise capital.

The frozen credit markets have been cited as a major source of the current economic problems, as banks have become reluctant to lend and the commercial paper market, which businesses rely upon to finance day-to-day operations have dried.

The actions came on a day that the Dow closed down about 100 points, its eighth consecutive decline.

Between the start and the finish was a day in which the Dow Jones industrial average swung 1,000 points and a final hour in which the market moved from almost 400 points down to 300 points higher, only to close down 128 points, or 1.4 percent, to 8,451.19. Friday’s close was the Dow’s lowest since April 25, 2003.

Another day, another series of violent swings. The Dow has lost 1,874.19 points, or 18.2 percent, in the last week, more than the 17 percent drop in the week that ended July 22, 1933.

The broader Standard & Poor’s 500-stock index fell 10.70 points or 1.1 percent, to 899.22 on Friday. The technology heavy Nasdaq managed to finish slightly higher, adding 4.39 points, to 1,649.51.

In the oil markets, crude for November delivery closed down $8.98, to $77.61 a barrel, the lowest since October 2007.

“People are scared,” Howard Silverblatt, senior index analyst at Standard & Poor’s, said. “Nobody believes what is coming out of the mouths of politicians, chief executives.”

The volatility came amid unrelenting pessimism about the health of the global economy and world governments’ ability to solve the global financial crisis.

President Bush sought to reassure the American people, and by extension the markets. “My fellow citizens, we can solve this crisis, and we will,” Mr. Bush said. .

So far, efforts and reassurances by the various governments to help restore confidence in the financial system have failed to open the credit markets, the short-term financing that businesses depend on to finance their daily operations.

“We are fighting really dire fundamentals,” said Gerhard Schwarz, an equity strategist at UniCredit in Munich. “It will require restoring trust and confidence before a sustained rebound will be possible.”

Investors and banks remained reluctant on Friday to lend money to one another for more than one day at a time. Commercial paper, a short-term i.o.u. used by corporations, was 4.7 percent for three-month loans, little changed from Thursday. The rates on overnight loans, however, fell to 1.8 percent, from 2.4 percent.

The amount of commercial paper outstanding fell 3.5 percent, to $1.55 trillion, for the week ended on Wednesday, according to the Federal Reserve. Since August, the amount of that debt has declined almost 14 percent.

At the same time, investors sought safety in Treasury bills, driving down the yield on one-month and three-month government debt to nearly zero, meaning that investor were willing to accept no return for the assurance of buying debt backed by the federal government.

But the price of longer-term Treasuries fell and yields, which move in the opposite direction of prices, shot up. The 10-year Treasury note yielded 3.87 percent in the early afternoon, up from 3.79 percent on Thursday. The move may reflect an announcement earlier in the week that the Treasury would issue more debt in the coming weeks.

In his statement, Mr. Bush said the federal government had “immense resources and a wide range of tools” to combat the crisis, and would use them aggressively.

He reiterated his belief in the recently enacted $700 billion financial rescue program and said that government officials were working with their counterparts in other nations to ease a crisis that is truly global.

“We’re in this together, and we’ll come through this together,” Mr. Bush said, addressing the people of the world as well as those of the United States. Speaking to Americans, the president said they “can be confident in our economic future” because they, like the nation’s economy, are “innovative, industrious and resilient.”

Although the president said nothing new in terms of policies or proposals, his remarks in the White House Rose Garden were nevertheless remarkable, reflecting how rapidly financial events have moved on and the extent to which worries in the United States reverberate around the world, and vice versa.

In Canada, the Toronto Stock Exchange index, which is heavily weighted with energy and commodity stocks, fell below 9,000 points for the first time since January 2005 on heavy trading. Although as the market closed it crept up to 9,065.2. That nevertheless reflected a 534.98-point drop.

Markets across Latin America were also lower, and the Mexican central bank was forced to auction off $6.4 billion in foreign reserves to push up the peso.

The major exchanges in Europe and Asia also declined Friday, adding new urgency to efforts to find a solution to the global financial problems and restore confidence in the markets.

European markets fell more than 10 percent at the opening, and stayed lower. In London, the FTSE 100 index was down 8.8 percent. In Paris, the CAC-40 was about 7.7 percent lower, and the DAX in Frankfurt was down about 7 percent.

Shares in Asia also declined. The Nikkei 225 stock index in Japan — already reeling from a nearly 10 percent drop Wednesday — slumped 9.6 percent on Friday, closing at 8,276.43.

Shares of the investment bank Morgan Stanley were down another 22.25 percent Friday after closing down 25.8 percent at $12.45 on Thursday. The bank has been fighting off speculation that its deal to raise $9 billion from Mitsubishi UFJ of Japan had run into trouble. But executives for both banks have said the deal was set to close Tuesday.

In Asia, the Japanese benchmark index has given up more than 25 percent of its value this month. The Hang Seng index in Hong Kong fell 7.2 percent on Friday, while the ASX/200 index in Sydney closed 8.3 percent lower.

“The fear indexes are dramatically high,” Mr. Schwarz noted, pointing to measures of volatility in the markets that were near record highs. “We are seeing intraday volatility this week of 7 percent to 9 percent in Europe.”