WASHINGTON — The Treasury Department confirmed Friday evening that it will buy stakes in major U.S. banks and financial institutions, announcing the bold move as leaders of the world's leading industrialized democracies agreed to guidelines for joint action but stopped short of taking coordinated steps sought by investors worldwide.
The revelation that Treasury will take nonvoting stakes in U.S. banks adds to a growing list of unprecedented government interventions into private financial institutions not seen since the Great Depression.
The list includes the seizure of mortgage-finance companies Fannie Mae and Freddie Mac, the rescue of global insurer American International Group with an $85 billion loan, emergency lending to several financial firms and the direct purchase of short-term promissory notes from U.S. corporations to bypass clogged credit markets.
The announcements came after another turbulent day on world financial markets, and after Treasury Secretary Henry Paulson held an emergency meeting in Washington with the finance ministers and central bank presidents from the Group of Seven, which includes the U.S., Canada, the United Kingdom, Germany, France, Italy and Japan.
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In a news conference, Paulson said he told the visiting financial leaders how he'll carry out the recently enacted $700 billion U.S. financial rescue package. He revealed that he plans to go beyond purchasing distressed bank assets to take non-voting stakes in U.S. financial institutions to help recapitalize them.
"We are developing strategies to use the authority to purchase and insure mortgage assets and to purchase equity in financial institutions, as deemed necessary to promote financial market stability," Paulson said. He added that Treasury's working to develop a standardized approach for a wide array of companies to help them attract private capital as well.
In a joint communique, G-7 finance ministers and central bankers said "that the current situation calls for urgent and exceptional action. We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth."
Their five-point guideline plan includes preventing bank failures; ensuring that credit and money markets return to normal functioning; enabling banks to raise capital from public and private sources; ensuring sufficient insurance of bank deposits; and restarting the secondary markets where mortgages and other loans are pooled into bond-like instruments.
"This is a period like none of us have seen before. ... There were not (questions) on what we needed to do," Paulson insisted, dismissing concerns that global investors wanted to see more immediate G-7 steps taken in unison.
Action would be coordinated where possible, he said, but "individual countries are going to have different needs and are going to approach the problems differently."
Perhaps the statement's most important point, however, was its message to the world that the G-7 powers are committed to coordinated and united action. Market analysts had stressed that such a stand was necessary to improve global confidence. That's the point Paulson emphasized in a statement he issued following the meeting:
"The G-7 is compelled to robust international partnership and cooperation. Never has it been more essential to find collective solutions to ensure stable and efficient financial markets and restore the health of the world economy," Paulson's statement said.
Over the weekend, Paulson will continue meeting with leaders of the world's 20 most important economies — including big emerging markets such as Brazil, Russia, India and China — to seek additional ways of restoring confidence in the financial markets. They're in Washington for meetings of the International Monetary Fund.
The G-7 meeting came at the end of a turbulent week in global financial markets.
In the U.S. on Friday, the Dow Jones Industrial Average swung more than 1,000 points in a wild day of trading, the biggest point swing in the blue-chip stock index's 112-year history.
The Dow closed down 128 points to 8451.19, the best daily finish in a dismal week that had the index down more than 18 percent, the worst week of its storied history. Before getting to that final number, however, the Dow fell almost 700 points after the opening bell Friday and briefly crossed below 8000 for the first time in five years.
In a rare bit of good news, some battered bank stocks including Citigroup and J.P. Morgan Chase rebounded, preventing even steeper losses in the Dow. The tech-heavy Nasdaq actually closed up 4.39 points, or 0.27 percent, to 1649.51. The S&P 500 posted modest losses of 10.70 points, or 1.18 percent, to 899.22. And the Russell 2000, an index of smaller companies, rose 4.6 percent.
The U.S. numbers were tame compared to the turmoil abroad Friday, as investors projected into the future and fretted about a sinking global economy. Japan's Nikkei exchange fell 9.6 percent, losing a quarter of its value this week. Exchanges in Hong Kong and Australia fell 7.2 percent and 8.3 respectively on Friday.
Asia's turmoil spread to Europe, where London's FTSE exchange was down 8.8 percent and exchanges in Germany and France closed down 7 percent and 7.7 percent respectively.
"There is no safe haven," said Evariste Lefeuvre, an economist with the French investment bank Netixis, told the BBC.
Most economists now project a U.S. recession and the possibility of a global one.
Another bright spot: Oil prices tumbled 10 percent, settling at $77.70 a barrel on the New York Mercantile Exchange, almost half of July's record of $147.
For U.S. motorists, that translates to lower pump prices. The nationwide average price for a gallon of unleaded gas fell to $3.35 on Friday, according to AAA. That's down 76 cents from the July 17 high of $4.11 a gallon and down 31 cents from a month ago.
Meanwhile the credit market at the heart of the global financial turmoil sent conflicting signals. The most closely watched credit measure is the London interbank offer rate, or Libor, a rate banks charge each other for short-term loans.
The British Bankers Association said Friday that the overnight Libor rate improved markedly, to 2.46875 percent on Friday from 5.09375 percent a day earlier. But the Libor rate for three-month loans, a sign of future confidence, actually rose from 4.75 percent to 4.81875 percent. Libor rates affect the cost of borrowing for U.S. businesses, as well as some rates on car loans, student loans and adjustable-rate mortgages.
President Bush on Friday again spoke to the nation, trying to soothe the nerves of ordinary Americans, who have seen their retirement plans plunge in value and their jobs threatened by the widening financial turbulence.
"We are a prosperous nation with immense resources and a wide range of tools at our disposal. We're using these tools aggressively," Bush said before the cameras on the White House lawn.
But this week's events are hard to shake off.
In Japan and elsewhere, some of the market drops over the past five trading days are on par with the faster two-day 25 percent drop in 1929 that is widely viewed as the trigger to the Great Depression.
That grim reference is not lost on the Federal Reserve and Treasury, which have taken a number of aggressive steps to avoid repeating the same mistakes made during the Depression.
Some analysts believe a more coordinated approach between major economies is needed if confidence is to be restored.
"One of the biggest lessons of the Great Depression is that countries only acted in self-interest, and if countries act in self-interest the chance of failure is much higher," said Jon Danielsson, an economist at the London School of Economics. "There is an increasing realization that the way out is for the large industrial nations to act with a single voice."
Already, the central banks of five major economies, including the U.S., took a coordinated half-point cut in their lending rates in a bid to show common resolve.
(Dion Nissenbaum contributed to this article from Paris.)
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