- The Washington Times - Monday, October 13, 2008

Leaders of 15 European countries announced a joint plan Sunday to put new money into their banks and guarantee their lending in the face of a global credit crunch, as international policymakers nervously awaited the reopenings of battered world stock markets on Monday.

The first news on Monday was encouraging. South Korean shares opened 2.5 percent up, and Australian shares jumped 5.7 percent. Singapore shares were 1.75 percent higher in early trading. New Zealand’s NZX 50 index was up 1.15 percent. Japan’s markets were closed for a holiday Monday.

In Washington, Treasury Secretary Henry M. Paulson Jr. urged developing nations not to be tempted by “isolationism and protectionism,” while top Democratic lawmakers said they were preparing a major new stimulus spending package for the reeling U.S. economy.

Top World Bank officials, holding their annual meeting in Washington, said after a daylong meeting Sunday that they were committed to helping the world’s poorest countries get through the crisis.

World Bank President Robert B. Zoellick warned that a lengthy credit crisis would hit developing countries particularly hard, especially those already facing higher food and fuel costs. Both the World Bank and the International Monetary Fund (IMF), also meeting in Washington, have roles, Mr. Zoellick said.

“Aid flows must be maintained,” he told reporters. “Today’s meeting of ministers was unanimous in that regard.”

At Sunday’s summit in Paris, the European leaders said they had agreed to a specific series of measures to aid their banks, including a guarantee of interbank loans through 2009, an action that Mr. Paulson has opposed for U.S. lenders. The collapse of such lending has frozen credit markets generally and bankrupted some major international banks and investment houses.

“The crisis over the past days had entered into a phase that makes it intolerable to opt for procrastination and a go-it-alone approach,” said French President Nicolas Sarkozy, host of the summit of leaders from the 15 nations that use the euro currency.

The leaders’ statement did not reveal key details of the accord, including the price tag.

British Prime Minister Gordon Brown, who attended the talks but did not sign on to the final plan, announced a similar $85 billion program to recapitalize and partially nationalize British banks last week. Britain maintains its own currency outside the euro system.

“This is a step in the right direction, and the good news is all the governments are on board,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., told Bloomberg News.

Market analysts said a summit of the Group of Seven finance ministers on Friday offered few concrete proposals to reassure nervous investors. Mr. Paulson hosted the gathering on the sidelines of the World Bank and IMF annual meetings.

In just one more sign of how the crisis is reshaping the financial landscape, the Federal Reserve on Sunday approved the takeover of giant North Carolina bank Wachovia Corp. by Wells Fargo & Co. of San Francisco. Wells Fargo won a bidding war with Citigroup after Wachovia’s shaky balance sheet forced it onto the auction block.

Art Cashin, director of floor trading for Swiss financial giant UBS, said on ABC’s “This Week” that Western governments will be under intense pressure to offer more than rhetoric after a series of moves that have failed to slow the downturn.

“I think it would be a major problem if they didn’t come out with some apparent coordinated plan,” Mr. Cashin said. “That’s been the problem in this crisis all the way through.”

Mr. Paulson warned nations, both poor and rich, against trying to shut their borders in the face of a mounting crisis. He said the Bush administration was resisting protectionist measures as he tried to stabilize the U.S. economy.

“Isolationism and protectionism will not offer a way out,” he said at a World Bank forum for developing countries. “Although we in the United States are taking many extraordinary measures to ease the crisis, we are not pursuing policies that would limit the flows of goods, service or capital.”

Democratic lawmakers appeared on Sunday talk shows to urge the Treasury Department to make capital more available to banks quickly and to start making direct purchases of bank stock using taxpayer money under the authority provided by the just-passed $700 billion Wall Street rescue plan.

Democrats also made clear they will push ahead with a stimulus package in a lame-duck session tentatively planned for mid-November.

“We are going to do a stimulus,” House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, told “This Week.” “I think the stimulus package is to give the middle class and the average citizen the same kind of relief that we tried to give to the financial sector.”

House Speaker Nancy Pelosi of California and other Democratic leaders in Congress reportedly are considering a $150 billion package, designed to help the economy in the face of job layoffs and plunging stock values. The bill would include extended jobless benefits, more funds for food stamps and another tax rebate.

House Minority Whip Roy Blunt, Missouri Republican, said he was open to a stimulus program “that made sense.”

“But let’s not use the stimulus package as an excuse to do what Democrats have wanted to do from Day One of this Congress, which is a huge public-works plan,” he added.

Coordinated international action to date - including synchronized interest rate cuts last week by the U.S. Federal Reserve, the European Central Bank and four other central banks - has failed to reverse the market slide or to thaw frozen credit markets.

Since the beginning of the month, all three leading U.S. stock indexes - the Dow Jones index of industrial stocks, the Nasdaq and the Standard & Poor’s 500 - have lost at least 20 percent of their value. The S&P 500 was off 18.2 percent last week alone, its worst weekly loss since 1933.

U.S. stocks staged a late rally Friday afternoon, ahead of the meeting of G-7 finance ministers.

Although bond markets will be closed for the Columbus Day holiday Monday, stock markets will open.

Meanwhile, high-profile bank acquisitions amid the credit crisis continued. Late Sunday, Spain’s Banco Santander SA was in advanced talks to acquire full control of Sovereign Bancorp Inc., the largest remaining U.S. savings and loan, a source familiar with the matter said.

A deal could be announced as soon as Monday, the source said, with Santander expected to pay about $3.81 a share, which was Sovereign’s closing price Friday on the New York Stock Exchange, valuing the company at about $2.53 billion based on shares outstanding as of July 21, Reuters reported.

Also on Sunday, Japan’s Mitsubishi UFJ Financial Group, which watched Morgan Stanley’s share price plunge last week, was amending its $9 billion deal to include only convertible preferred shares and no common stock, a person familiar with the matter said as reported by Reuters.

Some analysts were disappointed that the weekend G-7 meetings, including a Saturday afternoon White House summit with President Bush, produced a lot of rhetoric but few concrete proposals.

“The markets wanted maybe more assurance that there would be a unified global backstopping of the banks, and it doesn’t sound like that’s in there,” said Kim Rupert, managing director of global fixed income for San Francisco-based Action Economics LLC.

French Foreign Minister Christine Lagarde said of the G-7 joint statement, “Some of us hoped [the communique] had had more teeth to it, but at least it was endorsed.”

U.S. officials reportedly are reluctant to match the European guarantee on interbank lending because of the size of the American market and because a much greater share of such U.S. lending is between financial firms that are not commercial banks.

Democrats in Congress pressed Mr. Paulson on Sunday to embrace a plan under which the Treasury would use taxpayer dollars to directly subsidize U.S. banks, giving the government a share in troubled lenders. Mr. Paulson’s original blueprint called for simply purchasing the banks’ bad loans in an effort to spur lending again.

“I am hopeful that tomorrow, the Treasury will announce that they’re doing it,” said Sen. Charles E. Schumer, New York Democrat and chairman of the Joint Economic Committee. “And they have to do it quickly. … Markets are waiting.”

Richard W. Fisher, president of the Federal Reserve Bank in Dallas, said the U.S. central bank stood ready to consider any policy options to ease the banking crisis and restore confidence among lenders. Mr. Fisher said the Federal Reserve’s governors were even ready to drop their traditional secretive ways in order to reassure the markets.

“This morning, I am casting convention aside,” Mr. Fisher said in a panel discussion at the Institute of International Finance in Washington. “I speak for all of us when I say that the Federal Reserve will continue to explore every avenue and consider every option to see the credit markets through the crisis.”

The markets may get a clearer signal of the U.S. government’s intentions on Monday morning when Neel Kashkari, the Treasury official in charge of the bailout effort, gives his first major public address to a gathering of international bankers in Washington.

IMF chief Dominique Strauss-Kahn, in a joint news conference with Mr. Zoellick, said officials are essentially crossing their fingers and hoping the weekend’s activities and statements will calm the markets.

He said he expected investors to be cheered by the news from Europe, but, he added, “you can never be sure what will happen.”

This article is based in part on wire service reports.