Treasury secretary close to injecting public funds in return for equity holdings on Wall Street
The prospect of the American authorities following Britain's lead by taking ownership stakes in top banks has done little to cheer Wall Street, with sickly US stocks slipping exactly a year after hitting their all-time high.
Officials say the US treasury secretary, Henry Paulson, is seriously considering a direct intervention to aid struggling institutions by pumping billions of dollars of capital into banks in return for equity stakes.
Such a move would address fears that a $700bn (£407bn) government plan to buy banks' distressed mortgage-related assets may not be enough to re-establish confidence and to get banks lending to each other once again.
Paulson alluded to the possibility at a press briefing yesterday without giving any details, saying that a bail-out bill approved by Congress provided "broad, flexible authorities" for his department to "inject capital" as well as to purchase banks' troubled assets.
"We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size," he said.
Citing treasury officials, the New York Times reported today that recapitalization has become one of the most favored options under discussion in Washington, where there has been mounting alarm at a week-long rout in share prices.
The Dow Jones Industrial Average opened this morning with a rise of 187 points but within 90 minutes, it had given up its gains and was in negative territory, slipping by 84 points to 9,168. The blue-chip index has lost 35% since touching a record high of 14,165 a year ago to the day.
Among the big losers was America's biggest carmaker, General Motors, which saw its stock dive by 20% on ongoing fears about its cash position as sales of new vehicles suffer a steep decline.
There was a glimmer of economic relief, however, as the weekly number of new claims for jobless benefits dropped by 20,000 to 478,000. The figure slipped back from a seven-year high but remains above 400,000 - a level considered by experts to be an indicator of a recession.
In a note published today, Citigroup's global equity strategist Robert Buckland said corporate earnings were down 9% from their peak worldwide and are likely to fall by a further 15%. He said the profit cycle would not bottom until the end of 2009 at the earliest.
"The escalating financial crisis has battered world equity markets," said Buckland. "The failure of the policy response so far means that the risks of a major global economic downturn are rising by the day."
Any move by the US government to recapitalizes the banking industry is likely to prove controversial in a nation which prides itself in its free-market ethos.
William Isaac, a former chairman of the Federal Deposit Insurance Commission, said it could be necessary to address a "serious crisis of confidence". Already this year, 13 high-street banks have collapsed in the US, including big names such as Washington Mutual and California's IndyMac Bancorp.
Critics have accused the authorities of inconsistent treatment with some allowed to go bust and others, including Wachovia, rescued through takeover deals arranged by the government.
"There's just a lack of confidence because we don't know which bank is going to go next," said Isaac. "Banks we never thought would go, have gone."
The credit crunch has prompted banks worldwide to write off $592bn of losses on the declining value of derivatives, credit-linked assets and mortgage-related securities. The IMF expects these losses to double to $1.4 trillion. But according to the financial data firm Bloomberg, banks have only raise $442.5bn of new capital to make up for their losses.
© Guardian News & Media 2008
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