Bank Fears Trump Rate-Cut Hopes

By CNBC.com | 07 Oct 2008 | 05:29 AM ET

Global markets returned to the red on Tuesday after more bad news from the banking sector offset the shy optimism caused by a bigger-than-expected rate cut by the Reserve Bank of Australia.

Australia cut rates by a full point, sparking hopes of a coordinated lowering of interest rates at world level, and European stocks advanced shyly at the open.

But shares in three major UK banks -- thought to be well capitalized -- were hammered after a report that they might ask the government for funding reignited fears about how sound the banking system was. And markets across Europe retreated into negative territory.

Royal Bank of Scotland fell 30 percent, Barclays lost nearly 17 percent and Lloyds TSB nearly 20 percent after the BBC reported on its Web site that the three had asked Chancellor of the Exchequer Alistair Darling for taxpayers money.

AP Wall Street Trader

A Barclays spokesman told Reuters the bank had "categorically not" requested any funds from the UK government.

"We have categorically not requested capital from the government," Barclays spokesman Alistair Smith said, declining to comment on whether the bank had been involved in talks with the government on a potential recapitalisation.

A Lloyds TSB spokeswoman told CNBC "we haven't got any comment" on the report, while RBS also refused to comment, according to Reuters.

The request was made at a meeting with Darling last night, which was also attended by Bank of England Governor Mervyn King and Adair Turner, chairman of the Financial Services Authority, the BBC said.

The three banks estimate that they may need around 15 billion pounds of new capital each, with 7.5 billion pounds paid up front and a further 7.5 billion guaranteed by the Treasury that would be delivered if it became necessary, the report said.

The UK Treasury declined to comment, but said it would do whatever was necessary to maintain stability.

"As the Chancellor (of the Exchequer Alistair Darling) said yesterday, we will do whatever it takes to maintain stability and support a well-functioning banking system," a spokesman said.

A spokesman for Prime Minister Gordon Brown's office said he would not speculate on possible policy options. Britain's banking regulator, the FSA, declined to comment.

The cost of insuring the debt of the three banks fell sharply on the reports of a possible capital injection.

Five-year senior credit default swaps on RBS were about 30 basis points tighter at 270 basis points and about 20 basis points tighter at 230 basis points on Barclays, a trader said. That means investors have to pay 270,OOO and 230,000 euros to insure 10 million euros of the respective banks' debt against default.

"It's more of an equity story, as it look like shares will be diluted, while a capital increase is credit positive which explains how the CDS has reacted," a credit trader said.

Meanwhile European Union finance ministers are meeting in Brussels to discuss options on measures to restore confidence in the banking sector, but analysts say that the most likely outcome will be an agreement on guaranteeing private savings, without other major decisions.

Interbank money markets -- blocked for months by banks' refusal to lend to each other -- remained logjammed, with the cost of borrowing euros for three-month staying as high as 5.38 percent on Reuters system.

The FTSEurofirst 300 index fell 1.15 percent after falling 7.8 percent to four-year lows on Tuesday. MSCI main world equity index fell 0.5 percent, having lost more than 9 percent this month alone.

-- Reuters contributed to this report

© 2008 CNBC.com

Bailout Doesn't Resolve Fears On Economy, Credit

By CNBC.com with Wires | 03 Oct 2008 | 05:33 PM ET


Congress approved a $700 billion bank bailout Friday, but stocks tumbled as investors worried that the plan wouldn't be enough to stem the credit crisis or keep the US economy from falling into a recession.

CNBC.com Bailout Approved

The House approved the financial rescue plan by a vote of 263-171 and it was quickly signed into law by President Bush. The action ended two weeks of high-stakes haggling in Washington that had roiled global markets.

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Stocks, which rallied before passage of the bailout, immediately reversed course as investors focused on the economy and credit crisis. The market ended up with its worst week in seven years.

"The markets are still paralyzed," Loomis Sayles' Dan Fuss, one of the most widely followed U.S. bond managers, said after the vote. "We need confidence back in these markets and that really takes time."

In a sign of the spreading crisis, California said it was running out of money, France said the world stood on the "edge of the abyss" and European leaders divided over their response to the banking sector's difficulties.

Earlier Friday, the US reported its biggest monthly job loss in 5 1/2 years, coming on top of a pile of economic data pointing to an approaching recession. Data showed the U.S. services sector holding up.

Treasury Secretary Henry Paulson, who had been the administration's chief lobbyist for the plan, said he would move quickly to tap the emergency power to buy up distressed assets from banks.

At its core, the bill gives the Treasury Department $700 billion to purchase bad mortage-related securities that are weighing down the balance sheets of institutions that hold them.

The flow of credit in the U.S. economy has slowed, in some cases drying up, threatening the ability of businesses to conduct routine operations or expand, and adversely affecting consumers seeking financing for mortgages, cars and student loans. Some state governments have also experienced difficulty borrowing money.

Analysts cautioned it was still unclear whether the U.S. plan would work as advertised.

"There are more questions than answers out there still," said David Kelly, chief market strategist of JPMorgan Asset Management. "Will the Treasury be able to get the banks to participate? And the second question is, even if the banks do participate, how willing will they be to make new loans into the economy if they can get rid of the bad ones?"

The U.S. government has run up a charge of $1 trillion in recent weeks as it rushed to stabilize banks, including the earlier seizures of Fannie Mae and Freddie Mac, ratings agency Fitch Ratings said. That cost is equal to over 7 percent of the value of the world's largest economy, it said.

Earlier Friday, the hobbled financial sector was bolstered as Wells Fargo stepped in to buy Wachovia in a deal that would take the place of a shotgun merger with Citigroup brokered by U.S. banking regulators.

But in signs of the spreading crisis, California said it was running out of money, France said the world stood on the "edge of the abyss" and European leaders divided over their response to the banking sector's difficulties.

The House had shocked world markets on Monday by rejecting a previous draft. With elections on Nov. 4, lawmakers from both parties were wary of voter backlash in asking taxpayers to pay for Wall Street's mistakes.

On Friday, speaker after speaker from both parties on the House floor said rejecting the bailout could have devastating consequences for an already slowing U.S. economy, arguing the bill was as important for small businesses, homeowners, students and pensioners as it was for the financial sector.

"While the focus has been on the Dow Jones and Wall Street, we are addressing the real pain felt by Mr. and Mrs. Jones on Main Street," said House Speaker Nancy Pelosi, a California Democrat.

—AP and Reuters contributed to this report.

© 2008 CNBC

Congress Vows New Effort To Approve Bailout Plan

By CNBC.com With Wire Reports | 29 Sep 2008 | 07:20 PM ET

Democratic and Republican leaders pledged to try and hammer out a revised financial bailout proposal, but it was unclear how much support any new plan would get.

CNBC.com Bailout Fails

Congressional staffers told CNBC that there wouldn't be any votes on a new bailout proposal until Thursday at the earliest.

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After the House's surprise rejection of the $700 billion bailout bill on Monday, U.S. Treasury Secretary Henry Paulson said he was "very disappointed" but pledged to continue working with Congress to forge a rescue.

"I will continue to work with Congressional leaders to find a forward to pass a comprehensive plan to stabilize our financial system and protect the American people by limiting the prospects of further deterioration in our economy," Paulson said. "We've got much work to do, and this is much too important to simply let fail."

Citing recent bank failures in the United States and Europe, Paulson said regulators and legislators need to act "as soon as possible" to ensure the health of credit markets that U.S. businesses depend on to meet payrolls and purchase inventory.

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House of Representatives Speaker Nancy Pelosi said she was prepared to work in a bipartisan way with Republicans to get financial bailout legislation approved.

Pelosi, a Democrat, also told reporters she spoke to Paulson soon after the $700 billion bill to jump-start stalled capital markets was rejected by the House in a vote of 228-205.

Stocks plunged on Wall Street even before the vote to reject the bill was announced on the House floor. The Dow Jones Industrial Average closed down 777 points.

The failure of the bailout bill—after more than a week of intensive closed-door negotiation intended to hammer out a compromise plan—brought new uncertainty about the response of the government to the worst financial crisis since the Great Depression.

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CNBC Poll: What Do You Think?

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President Bush was set to huddle with economic advisers to consider the administration's next move after the White House failed to win support for the bailout plan from Bush's fellow Republicans.

"There's no question the economy is facing a difficult crisis that needs to be addressed,'' White House spokesman Tony Fratto told reporters.

The bailout plan was announced by the Bush administration last week. In the end, Republican House members voted against it by a more than 2-to-1 margin. A majority of Democrats voted in favor.

Rep. Barney Frank, a Massachusetts Democrat who helped craft the bill in hours of negotiations with leading lawmakers, said the next step could hinge on the economic fallout from the bill's failure.

Capping three hours of debate, House Majority Leader Steny Hoyer of Maryland had warned lawmakers that the cost of inaction would be an economic calamity beyond Wall Street.

"A meltdown would begin, it is true, on a few square miles of Manhattan, but before it was over, all of us know, no city or town in America would be untouched,'' Hoyer said.

Bush and a host of leading congressional figures had implored the lawmakers to pass the legislation despite howls of protest from their constituents back home.

The vote had been preceded by unusually aggressive White House lobbying, and spokesman Tony Fratto said that Bush had used a "call list" of people he wanted to persuade to vote yes as late as just a short time before the vote.

Lawmakers shouted news of the plummeting Dow Jones average as lawmakers crowded on the House floor during the drawn-out and tense call of the roll, which dragged on for roughly 40 minutes as leaders on both sides scrambled to corral enough of their rank-and-file members to support the deeply unpopular measure.

They found only two.

Current DateTime: 11:33:49 01 Oct 2008
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Bush and his economic advisers, as well as congressional leaders in both parties had argued the plan was vital to insulating ordinary Americans from the effects of Wall Street's bad bets.

The version that was up for vote Monday was the product of marathon closed-door negotiations on Capitol Hill over the weekend.

"We're all worried about losing our jobs," Rep. Paul Ryan, R-Wis., declared in an impassioned speech in support of the bill before the vote. "Most of us say, 'I want this thing to pass, but I want you to vote for it—not me.' "

With their dire warnings of impending economic doom and their sweeping request for unprecedented sums of money and authority to bail out cash-starved financial firms, Bush and his economic chiefs have focused the attention of world markets on Congress, Ryan added.

"We're in this moment, and if we fail to do the right thing, Heaven help us," he said.

© 2008 CNBC.com