Toxic-debt plan, short-selling curbs lift markets

By Patrick M. Fitzgibbons

Reuters Friday, September 19, 2008; 10:11 AM

NEW YORK (Reuters) - The U.S. government pledged $50 billion to guarantee money-market mutual funds, curbed short-selling and crafted a sweeping plan to mop up toxic mortgage debt, sending global stock markets soaring.

As U.S. government authorities brought out the big guns to tackle the mounting financial crisis, investment bank Morgan Stanley (MS.N) bought itself some time to come up with a plan for its future and continued talking to Wachovia Corp (WB.N) and other banks about a merger.

But much of the markets' focus on Friday was on Washington, as officials from President George Bush's administration, Congress and the Federal Reserve worked to craft a number of plans to restore confidence in shaken stock markets.

In the most recent example of a government entity stepping in to ease fears, the U.S. Treasury Department said on Friday it will use $50 billion to back money-market mutual funds whose asset values fall below $1 in another step to contain raging financial turmoil.

"It's all part of the program to restore confidence in financial markets. They are absolutely petrified of just a run on financial assets and they came very close to that on Thursday," said Boris Schlossberg, director of currency research at GFT Forex in New York. "At this point they have just decided that fiscal responsibility goes out the door and anything and everything that needs to be shored up financially will be done so ... It seems to be working."

U.S. stocks soared on the plans as the Dow Jones industrial average (.DJI) was up more than 400 points to 11,425 and the Nasdaq (.IXIC) rose more than 100 points at 2,303.

UK lender HSBC Holdings (HSBA.L)(0005.HK) walked away from a $6.3 billion deal for control of Korea Exchange Bank (004940.KS), fueling speculation it may be turning its attentions to its embattled rivals in the West.

And the Eurozone's largest bank, Spain's Santander (SAN.MC), declined to comment on a media report it was eyeing Bank of Ireland (BKIR.L), which has been pummeled by a property market slump at home.

After Britain's Financial Services Authority imposed a four-month ban on short selling financial stocks on Thursday, the U.S. Securities and Exchange Commission followed suit on Friday with an immediate 10-day ban. French regulator AMF said it was also talking to other Eurozone regulators about market dealings, leading to expectations that the ban would snowball.

Meanwhile the world's central banks redoubled their efforts to lubricate the seized-up money markets. Japan, Australia, India and Indonesia pumped in $42 billion after the U.S. Fed coordinated a $180 billion package a day earlier.

In Europe, there were signs that the stress was easing. The cost of borrowing dollars overnight fell back toward the Fed's 2 percent target, and three-month borrowing costs slid. The Bank of England offered $40 billion to banks, but only half of it was taken up.


Washington's proposal to draw the poison from banks' mortgage assets (ID:nLJ324290) and the first of the short-selling bans had an immediate and dramatic effect.

U.S. stocks clocked big early gains and while the price of gold and government bonds, traditional safe havens in times of turmoil, both fell.

U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke plan to work through the weekend with Congress on a plan to deal with the toxic bank assets that have been choking the financial system for a year.

"This is a more substantial and systemic solution than the ad hoc interventions we have seen in recent days," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour.

"At present, confidence is the most important factor, and this will only be maintained if the rescue plans are delivered on both sides of the Atlantic," said Andrew Turnbull, senior sales manager at ODL Securities.

The MSCI index of regional shares excluding Japan (.MIAPJ0000PUS) rose 7 percent and Tokyo stocks (.N225) ended up 3.8 percent. The Shanghai index (.SSEC) roared 9.5 percent higher after China stepped in with a reform package to halt a 69 percent slide from last October's record high. In Europe, all the continent's major markets jumped.


Sovereign wealth fund China Investment Corp (CIC), Morgan Stanley's largest shareholder, was said to be in talks to raise its stake to as much as 49 percent from its current 9.9 percent that it paid $5 billion for in December, sources familiar with the matter said.

Beijing is wary of adding to its Morgan Stanley holding, given that its existing holding is carried at a steep loss -- the whole bank was only worth $24 billion at Thursday's close. An unidentified CIC official told the Xinhua news agency that an increase in the stake would face U.S. political obstacles.

However, on Friday morning, a senior CIC official, quoted by the official Xinhua news agency, said Wall Street's two remaining stand-alone investment banks, Morgan Stanley and Goldman Sachs (GS.N), were capable of tackling their problems on their own.

Morgan Stanley declined to say it was in talks, but a spokeswoman confirmed it was "focused on solutions" to address its falling stock price.


A U.S. fund to deal with bad mortgage-related assets would be similar to the Resolution Trust Corp, which was set up to clean up bad debts from the savings and loan crisis in the late 1980s at a $400 billion cost to taxpayers.

"We talked about a comprehensive approach that will require legislation to deal with illiquid assets on financial institutions' balance sheets," Paulson told reporters.

According to two Congressional aides, he has been shopping around a plan to create the fund.

Rep. Barney Frank, who is chairman of the House Financial Services Committee, said there was concern that establishing a formal entity to buy the assets would take too long.

"I think it will start to provide a floor to asset values and allow institutions to work through this in a systematic manner. They won't have to rush into the arms of suitors to avoid collapsing," said Haag Sherman, co-founder and managing director of Salient Partners in Houston.

The financial crisis spilled into the U.S. presidential race as Republican Sen. John McCain said the Federal Reserve should "get out of the business of bailouts" while Democratic candidate Barack Obama said he supported efforts to shore up the financial markets' confidence and would hold off from presenting his own economic recovery plan.

(Additional reporting by Kevin Plumberg, Jeff Mason and Lucia Mutikani; Additional writing by Tony Munroe and Will Waterman; Editing by Jeff Benkoe, Dave Zimmerman)