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Bank rescues in Europe as House meets on bailout

September 29th, 2008 11:06 AM by Lehel Szucs

By Eddie Evans

NEW YORK (Reuters) - Regional bank Wachovia Corp succumbed to the worldwide credit crisis and authorities propped up a slew of European banks, while U.S. lawmakers met to vote on a $700 billion bailout of the financial industry.

U.S. stocks fell more than 2 percent on Monday, following sharp declines in Asian and European shares on fears the crisis was spreading. Global money markets remained frozen, even as central banks poured in cash in an attempt to boost liquidity.

"These (bank) announcements couldn't have worse timing because they're taking the shine off the potential bailout," said William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts.

With a tight vote ahead, President Bush urged lawmakers to pass the bailout package quickly, saying it was needed to keep the financial crisis from spreading.

The bailout was too late for Wachovia Corp, which agreed to sell most of its assets to Citigroup Inc in a deal brokered by the Federal Deposit Insurance Corp.

"In this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy," Treasury Secretary Henry Paulson said after the Wachovia deal was announced.

The Dow Jones industrial average was down 2.7 percent and the broader S&P 500 index was down 4 percent. The U.S. dollar gained against the euro and British pound after the European bank bailouts, but pared some gains after the Citigroup-Wachovia deal. Oil fell $8 a barrel.

Shares of U.S. regional banks sank, with National City Corp down 45 percent, suffering what analysts called a deepening crisis of confidence.

Around the world, investors dumped assets they regarded as risky. World stocks were down sharply, while gold and U.S. Treasuries surged in the search for safety.

The world's central banks, led by the U.S. Federal Reserve, announced a $330 billion expansion of currency swap arrangements, which allows them to increase the amount of money they can provide in their home markets, effectively throwing more money at the crisis.

Earlier, the governments of Belgium, the Netherlands and Luxembourg moved to partly nationalize Belgian-Dutch group Fortis NV with an injection of more than $16 billion, and German lender Hypo Real Estate Holding AG secured a credit line of up to 35 billion euros from the German government and banks.

British mortgage lender Bradford & Bingley Plc was brought under the government's wing, shares of French bank Dexia tumbled on a report that it might need emergency capital, and bank rescue deals also emerged in Iceland, Russia and Denmark.

"These (bank) announcements couldn't have worse timing because they're taking the shine off the potential bailout," said William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts.

The Wachovia deal is the latest in a series of events that has transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.

The changes include the government takeover of mortgage finance companies Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers Holdings Inc, the failure of giant savings and loan Washington Mutual, and Bank of America Corp's purchase of Merrill Lynch & Co Inc.

On Monday, Lehman Brothers' prized asset, money manager Neuberger Berman, was sold to private equity firms Bain Capital LLC and Hellman & Friedman LLC for a bargain-basement price of $2.15 billion. 

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Both U.S. presidential candidates, Republican John McCain and Democrat Barack Obama, have offered qualified support for the bailout proposal, an issue that has almost overshadowed their campaigns with less than six weeks until the election.

With many Americans struggling to save their homes from foreclosure, lawmakers braced for a grass-roots backlash against a bailout for Wall Street banks, which contributed to the U.S. housing bubble with reckless lending.

A deal struck in negotiations on Sunday altered key parts of the bailout program proposed by the administration.

In the final hours of talks, Democrats and Republicans rushed to add safeguards for taxpayers and provisions that would allow the government to recover funds if the housing market stabilizes and its holdings of bad debt gain value.

The proposed legislation would disburse the $700 billion in stages. The first $250 billion would be issued when the legislation is enacted; an additional $100 billion could be spent if the president decided it was needed. The remaining $350 billion would be subject to congressional review.

Institutions selling soured assets to the government would issue stock warrants to the government, a step intended to give taxpayers a chance to profit if markets recover.

The plan would also let the government buy troubled assets from pension plans, local governments and small banks.

In response to a clamor for limits on executive pay, no executives at companies in which the government directly purchases troubled assets would get multimillion-dollar severance packages, known as golden parachutes.

 

Posted in:General
Posted by Lehel Szucs on September 29th, 2008 11:06 AM

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