Administration ponders part ownership in banks

[Guest guest]

Maybe people don't get it, but every time the government intervenes

in this crisis, the DOW drops.

Now why could that be?

Could it be that the people who understand our economy the best, and

who have profited from it for years know that what the government is

doing will worsen the situation for the entire country in the long

run?

Gee whiz.

Administrator

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Administration ponders part ownership in banks

By MARTIN CRUTSINGER and JEANNINE AVERSA, AP Economics Writers

9 minutes ago

Calm gave way to fear in financial markets Thursday, turning a

relatively steady day into a rout that pushed the Dow

industrials below 9,000 for the first time in five years.

Investors, who had begun the day somewhat optimistic that the

government was taking extraordinary steps to contain the financial

crisis, turned gloomy under an onslaught of worries about the economy

and corporations.

Shares of General Motors Corp., one of the 30 stocks that make up the

Dow, tumbled 28 percent to their lowest since 1950. The Dow itself

shed almost 7 percent, or more than 600 points, to 8618.69. Broader

indexes also fell.

Lending also remained clogged. The London Interbank Offered Rate — a

key benchmark for the loans banks make to each other so that they can

lend to businesses and people — rose, signaling that banks remain

hesitant to make loans for fear they won't be paid back.

Wall Street had begun the day higher on news that the Bush

administration is considering taking part ownership in a number of

U.S. banks.

The aim of such a move would be to thaw the lending freeze that

threatens to push the world's economy into recession. It comes after

rampant fear about the global economy sent investors scurrying on

Tuesday for safety in U.S. government securities despite an

orchestrated round of rate cuts by the world's central banks.

The markets looked set to extend their six day rout another day,

though, as they grappled with worries that tight lending would throw

the global economy into a recession.

In an effort to show that governments around the world were focusing

intently on ways to resolve the crisis, the administration announced

that President Bush would meet with finance officials from the Group

of Seven major industrial countries at the White House on Saturday.

" The president will have the opportunity to hear directly from the

finance ministers about how the financial crisis is affecting their

respective economies and the steps they are taking to deal with these

challenges both individually and collectively, " presidential press

secretary Dana Perino told reporters.

Perino said Bush would stress " the importance of nations working in a

coordinated way to address the crisis while respecting the different

conditions in each economy. "

An administration official, who spoke late Tuesday on condition of

anonymity because no decision has been made, said the $700 billion

rescue package passed by Congress last week allows the Treasury

Department to inject fresh capital into financial institutions and

get ownership shares in return.

Treasury Secretary Henry son told reporters that Treasury was

moving quickly to implement the $700 billion rescue effort and he

specifically mentioned reviewing ways to bolster the capital of banks.

" We will use all the tools we've been given to maximum effectiveness,

including strengthening the capitalization of financial institutions

of every size, " son said at a Wednesday news conference.

His statements came on the heels of Britain's move to pour cash into

troubled banks in exchange for stakes in them — a partial

nationalization.

Asked whether he would try something like the British plan, son

said: " We have a broad range of authorities and tools. ... We've

emphasized the purchase of liquid assets, but we have a broad range

of authorities. And I'm confident we have the authorities we need to

work with going forward. "

The Federal Reserve on Wednesday cut its target for the benchmark

rate on overnight loans between banks to 1.5 percent. The cut from 2

percent took the rate to its lowest level in more than four years.

In an unprecedented coordinated move, central banks in England,

China, Canada, Sweden and Switzerland and the European Central Bank

also cut rates after a series of high-stakes phone calls over several

days between Fed Chairman Ben Bernanke and his counterparts.

The Fed acted in concert with the European Central Bank to make

emergency interest rate cuts after the Sept. 11 terror attacks in

2001. But Wednesday's cuts were unique in the number of nations that

participated, the Fed said.

For millions of Americans, the Fed's cut means borrowing money

becomes cheaper. Home equity loans, credit cards and other floating-

rate loans all fluctuate depending on what the Fed does.

Bank of America, Wells Fargo and other banks cut their prime rate by

half a point to 4.5 percent, also the lowest in more than four years,

after the Fed announced its decision early Wednesday.

Fed watchers believe the central bank might cut rates further when it

meets later this month, and perhaps again in December, in hopes of

cushioning the blow if the United States falls into recession.

Even the coordinated action may not break the fear that has gripped

investors across the world as jobs evaporate and retirement savings

dry up. Banks may still be inclined to hoard cash, and until they

decide to lend again the crisis is not likely to let up.

The government reported Thursday that jobless claims fell by 20,000

to 478,000 last week, within economists' expectations. The claims

still remain at elevated levels due to the struggling economy,

though.

The Fed's interest rate cut was a change in course. It had held rates

steady because of inflation concerns. Since the Fed had put a stop to

interest-rate cuts in June, the economic outlook has deteriorated.

" The pace of economic activity has slowed markedly in recent months, "

the Fed said. " Moreover, the intensification of financial market

turmoil is likely to exert additional restraint on spending, partly

by further reducing the ability of households and businesses to

obtain credit. "

Although inflation has been running higher, the Fed believes the

recent drop in prices for oil and gas, and the weaker prospects for

economic activity, have reduced the threat it poses to the economy.

The credit markets, which have been remarkably tight for weeks,

showed only small signs of loosening. Rates on commercial paper, the

short-term debt companies issue to raise cash for everyday expenses,

went down. But the rate banks charge each other for loans went up.

The Fed also reduced its emergency lending rate to banks by half a

percentage point, to 1.75 percent. Given the intense credit crisis,

banks have been borrowing more under what is known as the discount

window.

___

Associated Press writers Joe Bel Bruno and Anne D'Innocenzio in New

York, S. Rugaber in Washington and Pan Pylas in London

contributed to this report.

Copyright © 2008 The Associated Press. All rights reserved. The

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authority of The Associated Press.

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