Tuesday, October 7, 2008

TOPWRAP 13-Fed steps up in global scramble to stem crisis

* Fed's Bernanke signals readiness to cut interest rates
* Fed to buy short-term debt of companies
* Russia bails out banks, in loan talks with Iceland
* IMF sees global losses at $1.4 trillion
* BofA down 18 pct on dividend cut, new capital plan (Adds quotes from Bernanke, analyst, details on interest rate cut expectations, updates stock and bond prices)
(For full coverage double click nCRISIS]
By Daniel Trotta and Kevin Krolicki
NEW YORK/WASHINGTON, Oct 7 (Reuters) - The U.S. Federal Reserve stepped forward as a commercial lender of last resort and signaled a readiness to cut interest rates as governments around the world scrambled to stem the global financial crisis and calls arose for concerted action.
U.S. Federal Reserve Chairman Ben Bernanke signaled a readiness to lower U.S. interest rates to support an economy battered by a financial crisis of "historic dimension". ID:nN07466449 ID:nN07468076
"In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate," said Bernanke, who is regarded as an expert on the Great Depression.
In an unprecedented move, the Fed also created a new commercial paper facility that would buy short-term, highly rated debt, stepping into the corporate debt market in a program that falls outside the $700 billion rescue plan approved by the U.S. Congress on Friday. ID:nN07447246
Analysts credited the Fed with trying to create a fire break in the still-developing crisis, but stocks remained under pressure while U.S. government bond prices recovered in a flight to safety. ID:nN07466024 ID:nN07468678
"I think the Fed has done a reasonably good job considering the unusual situation we are in," said Joseph Trevisani, chief market analyst with FX Solutions. "The Fed has shown a great deal of flexibility in this. They're taking very practical steps." ID:nN07468076
Fed fund futures have priced in a 50 basis point cut by the U.S. central bank this month, with a 75 basis point cut an outside possibility. Expectations have built all week that the weekend meeting of Group of Seven officials in Washington could set the stage for coordinated rate cuts.
The actions of the U.S. central bank followed a day in which Russia negotiated an emergency bailout for Iceland and unveiled an aid package for its own banks ID:nL7111036, Australia slashed interest rates by 1 percentage point to 6 percent ID:nSP375711, and Britain considered a massive injection of public funds. ID:nL719996
Iceland, the North Atlantic island facing down a threat of "national bankruptcy," took over its second-largest bank and propped up a battered currency. ID:nL7266189
At ground-zero in the crisis, the interbank lending market remained stalled, with the cost of borrowing dollars, euros and sterling all higher as financial institutions sought to preserve capital and remained unwilling to lend to each other. ID:nL7192802
The International Monetary Fund increased its estimate of global losses from the financial meltdown to $1.4 trillion and warned the economic downturn was deepening. ID:nNYC000167
"The financial planet is in total crisis," European Central Bank Governing Council member Guy Quaden said.
Japan called for greater coordination but signaled it would not cut rates. China's banking regulator denied that Beijing might ride to America's financial rescue and a leading Chinese state newspaper said the world should avoid paying for the United States' mistakes. ID:nPEK13909
Japanese Prime Minister Taro Aso said he hoped the Group of Seven rich nations would send a firm message on stabilizing financial markets when it meets later this week in Washington.
"The impact would be substantial if the G7 didn't send a clear message. European leaders have met, but it didn't go well, and European financial markets have fluctuated rapidly and substantially, so I'm worried about the impact on Japan," Aso told reporters. ID:nTKF003049
World Bank President Robert Zoellick called the G7 ineffective, and said it should be replaced by a group that includes emerging economic powers like China, India and Brazil that have been drawn into the most recent wave of the crisis. ID:nN06391192
In Luxembourg, EU finance ministers agreed to increase the minimum level of bank deposit insurance across the 27 European Union countries. ID:nL7293899
European Commission President Jose Manuel Barroso warned that a succession of national responses by EU countries may lead to a "renationalization" of the financial system, reflecting concern that member states are ignoring EU rules in their haste to react to market turmoil. ID:nL7181853
Investors eagerly awaited progress on the $700 billion U.S. bailout but were uncertain it would be enough to contain America's home-grown mess, built on frenzied mortgage lending and trading in unregulated derivatives.
Voters looking to the U.S. presidential candidates for answers four weeks from election day instead have been hit by an increasingly nasty campaign. ID:nN19361994 Democrat Barack Obama, leading in most public opinion polls, was due to debate Republican John McCain on Tuesday night. ID:nN07421156
The Dow, now down 25 percent this year, opened higher after news of the Fed's commercial paper move, but then resumed its downtrend in volatile trade after a see-saw ride on world markets. ID:nL74477
A raft of U.S. corporate earnings reports were expected to reinforce the view that the world's largest economy shuddered into recession at the start of the current quarter.
Analysts expect overall earnings for companies in the S&P 500 index to fall 4.8 percent in the third quarter, down from an estimate of 12.6 percent growth as recently as July 1, according to Thomson Reuters proprietary data.
Alcoa Inc was due to report after the markets close on Tuesday, and General Electric on Friday in its first report since investor Warren Buffett came to the rescue last week with a $3 billion investment. ID:nL2142458
Bank of America Corp, in a surprise earnings announcement, halved its dividend and said it would sell at least $10 billion in new stock to raise capital and offset loan losses. Its shares were down 19.7 percent in afternoon trading on the New York Stock Exchange. ID:nN07447524
The largest U.S. bank, which has taken over mortgage lender Countrywide and investment bank Merrill Lynch this year, cited "recessionary conditions" in reporting a 68 percent slide in quarterly earnings. ID:nN06410858 (Reporting by Reuters bureaus around the world; Editing by Brian Moss, Steve Orlofsky, Toni Reinhold)

Stocks tumble as Street worries about financials

NEW YORK (AP) — Wall Street extended its steep declines Tuesday as enthusiasm over the Federal Reserve's latest efforts to inject frozen credit markets with a dose of much-needed confidence gave way to concerns about financial companies' balance sheets. Trading remained fractious, with the Dow Jones industrial average losing more than 225 points.

Federal Reserve Chairman Ben Bernanke warned in a speech on the economy Tuesday that the financial crisis could extend the difficulty the economy is facing. Some traders appeared to regard his remarks as a sign that an interest rate cut could be in the offing, but that did not stanch the losses that built on Monday's huge drop.

Investors appeared initially heartened but still very cautious following the Fed's announcement that it plans to buy massive amounts of corporate debt to jump-start lending in the markets where many companies turn for short-term loans. The evaporation of faith that loans will be repaid has lenders weary and is making it more difficult and expensive for businesses and consumers to borrow.

Credit markets showed some signs of easing as demand for safe-haven investments decreased. Credit markets seized up last month after Lehman Brothers Holdings Inc. declared bankruptcy and the government stepped in to rescue insurer American International Group Inc.

The Fed's latest move is designed to lubricate the lurching credit markets whose troubles have spread to other parts of the economy. Still, the measure stops short of a broad interest rate reduction that some investors say is necessary to restore confidence in the market. Other market watchers argue, however, that more focused steps like Fed's decision to buy commercial paper are what's needed.

But some investors remain worried about financial companies like Bank of America Corp., which after the closing bell Monday slashed its dividend and reported that its third-quarter profit fell 68 percent. The stock fell $6.18, or 19 percent, to $26.04 and was the steepest decliner among the 30 stocks that comprise the Dow industrials.

And a rumor that Mitsubishi UFJ Financial Group Inc. was pulling out of a deal to acquire up to 24.9 percent of the voting shares of Morgan Stanley sent the investment bank's stock tumbling $5.40, or about 23 percent, to $18.10.

Investors are fearful that financial companies will continue to face cash shortages even with efforts in Washington and by other governments to resuscitate lending.

"I think we have weeks of volatility ahead of us," said Kim Caughey, equity research analyst at Fort Pitt Capital Group.

She said the write-downs of bad debt at Bank of America are a reminder to investors that troubles within the financial sector remain.

The concerns weighed on stocks after Monday's rout. In early afternoon trading, the Dow fell 227.87, or 2.29 percent, to 9,727.63, a day after the blue chips dropped below 10,000 for the first time in four years. The Dow fell as much as 800 points on Monday before finishing with a loss of 370.

Broader indexes also fell. The Standard & Poor's 500 index declined 26.74, or 2.53 percent, to 1,030.15, while the Nasdaq composite index fell 55.39, or 2.97 percent, to 1,807.57.

The dollar was mixed against other major currencies, while gold prices fell.

Oil prices rebounded after plunging Monday to an eight-month low on concerns a global recession will undermine demand for crude. Light, sweet crude rose $1.25 to $89.06 a barrel on the New York Mercantile Exchange.

Concerns about the credit markets still fed demand for the relative safety of government debt, though pressures eased. The yield on the three-month Treasury bill, which moves opposite its price, rebounded to 0.88 percent from 0.50 percent late Monday. Demand for short-term Treasurys remains high because of their safety; investors are willing to take extremely low returns just to have their money in a secure place.

Some investors moved into longer-term Treasury bonds, which while still safe don't draw as much demand as shorter-term debt in times of fear. The yield on the 10-year note fell to 3.49 percent from 3.50 percent late Monday.

Investors are still hoping to see other moves from the Fed to boost confidence. Australia's central bank lowered interest rates by the largest amount since 1992 in a surprise move, and that reignited hopes that others, including the Fed and European Central Bank, might follow suit.

Though not giving the market a rate cut, the Fed has taken other steps to help unclog the credit markets. On Tuesday, policymakers provided more details about when it will make $900 billion in short-term loans available to squeezed banks.

The loans are made available to banks through auctions. The Fed, in coordination with other countries' central banks engaged in similar efforts, laid out dates that it will conduct the auctions through the rest of this year.

"The Treasury stepping into the commercial paper market is good news," said Peter Cardillo, chief market economist for Avalon Partners. "The Fed is doing everything they can to have confidence return to the markets, and maybe an interest rate cut is next. The central bank is doing what it should be doing as a lender of last resort."

Minutes from the Fed's last meeting described a U.S. economy that was slowing considerably and credit markets that were deteriorating rapidly. The meeting was held Sept. 16, the day after the failure of Lehman Brothers. The central bank's Open Market Committee found the risks from weaker growth and higher inflation were roughly equal; that was its rationale for leaving rates unchanged. Policymakers, who will meet again at the end of the month, left key interest rate unchanged at 2 percent.

Technology stocks saw some support after chip maker Advanced Micro Devices Inc. said it will spin off its manufacturing businesses into a new venture with Abu Dhabi-backed Advanced Technology Investment Co. AMD said the deal will dramatically cut costs and allow it to better compete with chief rival Intel Corp. AMD jumped 77 cents, or 18 percent, to $5. Intel slipped 17 cents to $16.76.

Wall Street is also looking for Alcoa Inc. to unofficially kick off earnings season when it releases results after the closing bell. Alcoa rose 10 cents to $18.21.

Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 966.8 million shares.

The Russell 2000 index of smaller companies fell 24.98 or 4.19 percent, to 570.93.

Overseas, Japan's Nikkei stock average fell 3.03 percent. Britain's FTSE 100 rose 0.35 percent, Germany's DAX index fell 1.12 percent, and France's CAC-40 rose 0.55 percent.

US takes on corporate debt as Europe reels with new rescues

WASHINGTON (AFP) — The US opened up a major new front Tuesday in the global financial crisis, backstopping huge amounts of corporate debt as European governments staged new rescues, but the moves did little to boost market confidence.

The US Federal Reserve said it would buy up short-term commercial paper or company debt in an effort to kick-start credit flows and ease a squeeze in bank lending, a move described as "necessary to prevent substantial disruptions to the financial markets and the economy."

A Fed official said the move is aimed at restoring flows in a market worth some 1.3 trillion dollars needed for corporate day-to-day funding that has been nearly halted by a credit crunch.

Despite the dramatic move by the Fed and new actions in Europe, markets ran into new turbulence a day after a meltdown in most stock markets.

A rebound on Wall Street faded and skittish investors sent the Dow Jones industrials down more than 300 points or 3.07 percent to 9,656 in afternoon trading. European bourses were mixed a day after record falls in many countries.

EU finance ministers agreed at a meeting in Luxembourg to increase an EU-wide savings deposit guarantee to 50,000 euros from 30,000. They said they would coordinate their response to the crisis.

In Russia, the Kremlin pledged 36 billion dollars to strengthen banks, but the move failed to help confidence. The RTS market finished down 0.95 percent after a record 19 percent slide Monday.

Iceland, where the economy is imperiled by debt and the credit crunch, nationalized its second biggest bank, Landsbanki, and gave its biggest institution, Kaupthing, a 500-million-euro (678-million-dollar) loan. Glitnir bank, the third largest, was nationalized last week.

Russia also agreed to negotiate a four-billion-euro (5.4 billion dollar) emergency loan to help Iceland's fight against national bankruptcy.

The credit crunch remained acute with banks desperate to find dollars even at punitive interest rates.

The European Central Bank on Tuesday pumped 50 billion dollars (37 billion euros) back into interbank money markets, but it said banks sought more than twice that amount.

The ECB said 67 eurozone banks had requested more than 109 billion dollars, and paid a whopping 6.75 percent for dollars made available in the daily attempt to keep cash flowing through the financial pipeline.

It announced a schedule for new coordinated action with other central banks to support the provision of dollars to cash-strapped commercial banks.

The Bank of Japan also poured more billions into the system.

In the US, the Fed gave no estimate of how much money would be put into the new campaign, but said the new program to soak up corporate debt would begin rapidly.

The US administration has already committed 700 billion dollars to a bailout of banks' bad debt and the latest move extends the government support.

John Ryding, economist at RDQ Economics, said most of the new funds are likely to go to banks and financial companies that have been trying to roll over debts linked to troubled real estate investments.

"This is basically unsecured lending to the banks," Ryding said.

The market in short term company debt -- commercial paper and short-term securities issued by companies and banks for payrolls and day-to-day expenses -- is worth tens of billions of dollars each day.

The Fed action came a day after the Fed agreed to pay interest on commercial bank reserves with the central bank, a move aimed at helping the central bank keep control of interest rates in a frozen market.

Fed chairman Ben Bernanke said meanwhile the US central bank must consider whether its current interest rate policy "remains appropriate" in view of exceptional market turmoil.

Bernanke, speaking to business economists in Washington, provided a hint that the US central bank could cut rates as part of its efforts to stem a widening financial crisis.

He said the turmoil in markets and latest data suggest "that the outlook for growth has worsened and that the downside risks to growth have increased."

"In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate," he said.

Bernanke's comments came amid growing calls for rate cuts by the Fed, possibly coordinated with other central banks, to help augment the exceptional measures undertaken to battle a credit crunch that threatens economic activity.

The current base Fed rate is 2.0 percent, and some analysts have said they expect a cut on or before the Fed's next policy meeting October 28-29.

"There is little to keep the Fed from cutting interest rates as it attempts to protect against a more severe recession," said Ryan Sweet at Economy.com.

"We expect the Fed funds rate to be at 1.5 percent by year's end. The 50-basis point cut will not cure all that ails the economy, however."

Bernanke noted that financial systems in the US and much of the rest of world are "under extraordinary stress," but expressed confidence that the steps being taken would eventually ease the crisis.

US President George W. Bush discussed the global economic meltdown with leaders of Britain, France and Italy, seeking a common strategy ahead of weekend crisis talks.

"I was on the phone with them this morning to ensure that our actions are closely coordinated. We live in a globalized world; we want to make sure that we're effective," he said in a speech outside Washington ahead of a meeting Friday of finance chiefs from the Group of Seven industrialized nations.