Equity markets soar on U.S. Treasury’s plan to buy stakes in banks

Equity markets soar on U.S. Treasury’s plan to buy stakes in several big banks. US prepares $250bn banks push.

(Financial Times) - Global stock markets staged a historic rally on Monday as European governments pledged a total of €1,873bn ($2,546bn) to shore up their financial sector and the US prepared to unveil its own comprehensive rescue plan today.

In New York , the S&P 500, which last week fell 18.2 per cent, rose 11.6 per cent – the biggest daily gain since the volatile trading of the Great Depression.

The US was expected to announce that it would commit $250bn, out of the $700bn rescue package agreed earlier this month, to a recapitalisation programme, provide a temporary sovereign guarantee for bank borrowing and expand depositor protection.

About half the money would be invested in bigger US banks including Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley – with the largest lenders receiving as much as $25bn. The rest of the $250bn would go to as yet unspecified smaller financial institutions.

Bankers said the Treasury offered to purchase a specific amount of three-year preferred stock in each bank on a take-it-or-leave-it basis.

The Treasury summoned top bankers including JPMorgan’s Jamie Dimon, Morgan Stanley’s John Mack and Goldman’s Lloyd Blankfein to brief them on the plan. The heads of the country’s largest banks were on Monday 13 October 2008 night trying to decide whether to participate in the programme.

Earlier, Germany unveiled a far-reaching plan closely modelled on last week’s British initiative. It will issue up to €400bn in credit guarantees for inter-bank lending and set aside a €100bn fund to inject capital in financial institutions and acquire illiquid assets. France meanwhile said it would guarantee up to €320bn in inter-bank loans and provide €40bn in new capital for banks. Christine Lagarde, French finance minister, said French banks should use the funds to raise their tier one capital ratios to 9 per cent, so that they are on “a level playing field” with British banks.

The Netherlands, Spain, Italy, Austria, Portugal and Norway joined the effort, committing a total of €501bn in guarantees and capital, while the British government said it would provide £37bn ($64bn) in new capital to three of the country’s largest banks – as part of its already announced £400bn bail-out plan.

The yen and the dollar tumbled yesterday 13 October 2008 as risk appetite improved after central banks in U.S. and Europe announced a string of measure to help stabilize the financial system. The yen and the dollar have been major beneficiaries of increased risk aversion but faced strong pressures on Monday after plans that the U.S. Treasury may take stakes in several big banks.

Gold declined 2 percent on Monday 13 October 2008 as investors reversed previous safe-haven trades after the U.S. and Europe announced plans to inject billions of dollars into the financial system and restore confidence. Spot gold reached a low of $821 but moved off its low as the dollar weakened against other currencies such as the euro.

Crude oil futures rose more than 4 percent on Monday 13 October 2008 , rebounding as stock markets soared on news that the U.S. Treasury will be buying stakes in several big banks. Weakness in the dollar and news that Saudi Arabia will cut supplies next month to one major Europe-based refiner with a global system also support oil prices higher.

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