Rescue Package US Follows Europe in Partial Bank Nationalizations
The United States is expected to announce Tuesday it will invest in top banks and thousands of others in a partial nationalization of the finance sector that mirrors British Prime Minister Gordon Brown's plan. Meanwhile, European governments are moving forward with similar bailouts.
Washington is now hopping on the European bandwagon by partially nationalizing American banks in order to rescue Wall Street.
Henry Paulson is first expected to announce his new plan to solve the credit crisis on Tuesday, but details that the United States Treasury Secretary is planning to shift his strategy to combat the financial crisis began leaking on Monday night. According to reports in the Washington Post and Wall Street Journal, the Bush administration is planning to use much of the money provided in the first tranche of the Congressional bailout package to make direct government investments in US banks.
According to the papers, Washington is planning to invest $250 billion in the banks, forcing nine of the country's biggest banks to accept Treasury Department stakes. The Wall Street Journal reports that stakes in "possibly thousands of other banks" are expected. The paper also claims that "some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure" from Paulson. The "extreme steps," the paper writes, would "intertwine the banking sector with the federal government for years to come."
The $250 billion would consume most of the initially approved slice of a $700 billion bailout that Congress has already released to Paulson. For additional disbursements, Paulson must seek approval in the House of Representatives and Senate. The Washington Post reports that the treasury secretary plans to immediately request a second installment of $100 billion.
The plan would also provide comprehensive loan guarantees as well as backing for non-speculative credit. The papers report that details of the plans are still being negotiated.
With his new initiative, Paulson appears to be conducting an about-face with regard to his government's previous policies and to be adopting an approach similar to that being used in Europe. Paulson's original plan envisioned primarily purchasing bad mortgages and other rotten debt in order to restore trust in the financial system. The Bush administration hadn't even considered the idea of government investments -- Congress first addressed the issue in its revisions of the bailout package. According to the Wall Street Journal, the new plan largely replaces the former ideas, which failed to restore confidence, leading to dramatic decline of stock markets last week.
The West Moves to Adopt Brown Model
At an international financial summit held over the weekend in Washington, Western industrial nations all expressed their preference for the rescue strategy developed by British Prime Minister Gordon Brown. The focus of the plan is comprehensive credit guarantees and direct investments, the de facto partial nationalization of banks. Several other European governments, including Germany, France, Spain and Italy said they would adopt similar approaches on Monday. In Germany, Chancellor Angela Merkel's cabinet approved a 500 billion bailout package, which is expected to be presented to parliament on Wednesday, with a vote expected on Friday.
The US Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank have also said they would lend commercial banks as much liquidity as they needed. The Dutch government also promised up to 200 billion in guarantees for interbank loans to temper the credit crisis on Monday.
The announcements of the European rescue plans over the weekend led to a rally in markets around the world -- one that continued on Tuesday. Japan's Nikkei index rose by an historic 14.2 percent, breaking through the psychologically important 9,000 point mark. Gains also continued on the German blue chip DAX index, which was up 4.24 percent to 5,277.13 in late morning trading.
The gains started one day earlier, when the Wall Street closed with 11 percent gains. The Dow Jones index rose by 936 points -- its greatest gain ever on a single day. The DAX also increased at a record rate, closing at 5062 points, an 11.4 percent increase. In terms of percentage gains, it was the best day in the German index's 20-year history.
As the first indications came of a recovery on the New York Stock Exchange on Monday night, German Finance Minister Peer Steinbrück of the center-left Social Democrats said it was exactly the response he had imagined. The movement on the markets showed that the new plans for dealing with the crisis were already showing positive results. He said the new messages coming from the US government could further buoy markets.
Meanwhile, in a round of television interviews on Monday night, Chancellor Merkel of the conservative Christian Democrats said bankers would be expected to do their part to help stop the financial crisis. She said she expected banks to conduct a "critical analysis" of the actions that led to the crisis, and that banks must state what they will do to ensure it isn't repeated. "It is my expectation that the (finance) industry will not defy regulations as it has done in the past," she said.
Merkel also reiterated her call for a concerted international approach. Merkel is calling for the International Monetary Fund (IMF) to be given a central role as the institution that proposes new financial markets regulations and also serves as a global watchdog. The chancellor said there had been "excesses" in the markets and that risks had been taken that were "indefensible." Now, she added, the industry has been assigned to the state, and the chancellor hoped that would lead to a greater sensibility in the sector.
In Germany, however, some states have expressed their opposition to Merkel's bailout plan. The federal states here each have a savings and loan system known as the Sparkassen. So far the government has said it would back savings in private banks, but not public-owned banks. This would leave taxpayers in the individual states left footing up to 35 percent of the bill for the private banks and also having to secure the savings of their own state-run banks entirely on their own. "This will overburden the states and it's absolutely excessive and unacceptable," said Erwin Huber, the outgoing head of the conservative Christian Social Union party in the southern German state of Bavaria. Huber also claimed the federal government didn't consult the states before approving its bank bailout package. He did concede, however, that his state would approve the package.
"I don't want it to collapse," he said.
-- dsl with wire reports.