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European action sparks record-setting market rally
Question of the Day
European governments Monday helped spark a record-shattering global market rally, pledging more than $2 trillion in taxpayer money in a coordinated strike to shore up the Continent’s banks as the Bush administration scrambled to rework its own $700 billion Wall Street rescue package.
The news electrified investors, with the Dow Jones index of industrial stocks gaining a stunning 936.42 points (11 percent) to 9,387.61, nearly doubling the previous record single-day point gain. The broader Standard & Poor’s 500 Index bounced back from the second-worst week in its history with an 11.6 percent rally that was its steepest daily gain since 1939.
All other major U.S. and foreign markets were up sharply after a week of record losses, while a leading international lending rate for banks - a key indicator of the depth of the credit crunch - fell slightly.
Germany’s leading stock index rose 11.4 percent, France’s bellwether index was up 11.2 percent, and Britain’s FTSE 100 was up 8.3 percent, despite the news that the government of Prime Minister Gordon Brown was paying out $63 billion to take effective control of the country’s three largest banks.
Britain, Germany, France, the Netherlands, Spain, Portugal and Austria pledged a combined $2.3 trillion in taxpayer money to buy shares in teetering banks and guarantee interbank loans that have dried up in the global credit freeze. The total pledge is more than three times the $700 billion Congress authorized to address the American financial crisis.
“United Europe has pledged more than the United States,” said French President Nicolas Sarkozy, who hosted a summit of European leaders in Paris Sunday to prepare the strike.
The increase continued as the Asian markets opened on Tuesday. Japan’s Nikkei stock index surged 13.04 percent by the lunch break Tuesday, one of its biggest ever rises, Agence France-Presse reported. Hong Kong share prices opened 5.1 percent higher on Tuesday, while Philippine share prices opened 7.34 percent higher. Australian shares leapt more than 5 percent by noon Tuesday, the news agency reported.
Mr. Brown, whom many market watchers credit with drawing up the basic blueprint now being adopted in Europe and by U.S. regulators, told reporters in London, “In extraordinary times, the government cannot just leave people on their own to be buffeted about.”
An estimated $340 billion of the pledged money would be used directly to recapitalize banks, with the governments taking an ownership stake in return.
Even the German government, which had been resisting the need for a government bailout of its banks, said it was now putting up $671 billion to shore up banks and reassure nervous depositors.
“We are taking drastic action, no question about it,” German Chancellor Angela Merkel told reporters in Berlin.
The Bush administration has been slower to organize its own rescue operation, and has been wary of Mr. Brown’s plan to invest directly in the nation’s banks in a bid to jump-start lending.
Treasury Secretary Henry M. Paulson Jr. met with top Wall Street bankers in Washington Monday amid speculation U.S. officials were reworking their original rescue plan to more closely mirror the European effort and provide faster relief for paralyzed lenders.
Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, JPMorgan Chase & Co. CEO Jamie Dimon, and Bank of America Corp. CEO Kenneth Lewis were slated to attend.
Traders said news of the meeting helped fuel the rally on Wall Street, as it was taken as a sign the Bush administration was closer to launching its rescue plan and that purchasing shares to recapitalize banks was gaining favor as an option.
About the Author
Raised in Northern Virginia, David R. Sands received an undergraduate degree from the University of Virginia and a master’s degree from the Fletcher School of Law and Diplomacy at Tufts University. He worked as a reporter for several Washington-area business publications before joining The Washington Times.
At The Times, Mr. Sands has covered numerous beats, including international trade, banking, politics ...
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