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)