Tuesday, September 23, 2008

Fears Emerge Over 700 Billion Dollar Rescue

The dollar buckled, stocks tumbled and the price of oil jumped on Monday as the $700bn (£376bn) US government bail-out plan for the financial sector made slow progress in Washington and once-mighty Wall Street names turned to Japan to safeguard their future.

Meanwhile, the Federal Reserve threw open the doors to investment in the US banking industry by private equity firms, sovereign wealth funds and corporate investors – in the hope that this would direct much-needed capital to US banks.

The US central bank said it would raise the maximum stake a minority investor could take in a bank holding company from 25 per cent to 33 per cent in some instances and lift the ban on board representation for minority investors.

Morgan Stanley said earlier it would sell a stake of 10-20 per cent to the Mitsubishi UFJ Financial Group (MUFG) in a deal worth up to $9bn. The news came just hours after Nomura, Japan’s largest broker, confirmed it was buying Lehman Brothers’ operations in Asia and was in exclusive talks to secure parts of its business in Europe.

Investors fretted about the pace of negotiations over the plan for a $700bn government fund to buy toxic assets from banks, while also worrying that even if the fund is set up, it may not succeed in turning around the credit crisis.

Until Monday, the US dollar had held up surprisingly well in the face of the past week’s turmoil on Wall Street. But it finally fell back in the face of concern over the cost of the bail-out and the fragile state of the US banking system, sending the price of commodities priced in the US currency soaring.

The dollar lost 2 per cent against a basket of major currencies, with the euro rising 2.6 per cent to above $1.48. Near-term crude oil futures prices jumped more than $25 a barrel during the day – the largest one-day rise in dollars terms ever – as investors were forced to cover positions before the expiry of benchmark contracts.

The S&P 500 dropped 3.8 per cent, giving back nearly all the gains registered on Friday, the first full day of trading after Treasury Secretary Hank Paulson revealed his bail-out idea during a dramatic Capitol Hill meeting. In London, the FTSE 100 fell 1.4 per cent.

President George W. Bush called on Congress to “keep the rescue bill focused on solving the crisis in our financial markets”. People close to the talks said they were not moving as quickly towards resolution as some had hoped, but remained on track.

Senior Democrats in the House and Senate circulated proposals involving tighter oversight, various proposals to allow or require the government to take stakes in companies taking part in the scheme, allow bankruptcy judges to write down mortgages and curb executive pay at banks selling assets to the government fund. Mr Paulson is resisting making pay or the transfer of equity to the government a precondition for selling assets to the fund, arguing this would ensure that only banks on the brink of failure take part.

The Group of Seven industrialised nations said its members “strongly welcome the extraordinary actions taken by the US”. However, other nations said they saw no immediate need to create their own funds to buy distressed assets. On Sunday, Morgan Stanley and Goldman Sachs gave up on attempts to remain as the only two standalone investment banks and became “bank holding” companies to gain expanded access to bank deposits and permanent access to Federal Reserve liquidity support.

Analysts said the speed with which Morgan Stanley turned to Asia for a capital lifeline underscored how quickly the world’s wealth was moving from the US.

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