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.
At the White House, President Bush hosted Italian Prime Minister Silvio Berlusconi and said Washington would work with other capitals to ease the financial panic and restore economic growth.
“In these times of economic turmoil, we’re working with other governments to resolve the troubles of the financial markets,” Mr. Bush said. Mr. Berlusconi told reporters the leaders of the G-7 nations would be meeting soon for a summit on the crisis.
Neel Kashkari, the Treasury Department official in charge of the U.S. financial rescue operation, said in a Washington speech that the department has moved quickly to staff the bailout effort and set up the operating guidelines, but gave no date on when the first deals might be made.
Unlike with the British plan, Mr. Kashkari signaled that the U.S. program would not be mandatory and would include purchasing bad loans and securities from ailing banks without demanding an ownership stake.
“The equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions,” he told a packed forum sponsored by the Institute of International Bankers.
Congressional Democratic leaders Monday pressed the administration again to expand its program to buy shares in troubled banks. Proponents say the method will inject money in the banking system much more quickly and give taxpayers a chance to benefit if the companies that participate return to profitability.
Paul Krugman, the Princeton University economist and New York Times columnist who was awarded the Nobel Prize for Economics Monday, said in a commentary that U.S. policymakers should follow the lead of Britain’s Mr. Brown.
While the ultimate success of the bailout is uncertain, “the Brown government has shown itself willing to think clearly about the financial crisis and act on its conclusions,” Mr. Krugman noted.
“And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own.”
The Bank of America, in a research note to investors, said, “After a haphazard start, Europe is finally getting its act together. The size and nature of the national plans suggest that they could finally make a difference.”
Tensions over policy in the face of a global economic meltdown spilled over into the annual meetings of the World Bank and International Monetary Fund this week.
With the imploding U.S. mortgage market at the heart of the crisis, U.S. officials were often on the defensive over the failure of regulators to head off the asset crisis sooner.
This article is based in part on wire-service reports.