US may take stakes in banks

Rate cuts fail to stabilize world markets

The Treasury Department is considering taking ownership stakes in many United States banks after emergency interest rate cuts by the Federal Reserve and central banks around the world yesterday failed to end a global panic in financial markets.

The plan, according to government officials cited in the New York Times, could resemble a similar effort announced by the British government yesterday to shore up its ailing banking system. The US government's $700 billion bailout gives the Treasury the authority to inject cash directly into the banks that request it. The move would more quickly enable ailing banks to resume lending than just having the government purchase bad debt off corporate balance sheets, which could take another month.

It is another sign that Washington efforts to stabilize the economy are not working quickly enough to restore confidence in the financial markets.

The Dow Jones industrial average shed an additional 189 points yesterday, following losses of more than 500 points Tuesday and more than 300 Monday. The Dow has plunged nearly 1,600 points, or 15 percent, in a week.

Markets have continued to slide despite extraordinary actions by the Fed and other cen tral banks. The financial crisis is battering confidence from Tokyo to Brazil and pushing the world economy towards recession, analysts said. The ultimate solution will require time and pain as financial firms and US households work through heavy debt and falling asset values left by the collapse of the housing and credit bubbles, they said.

"There's no instant cure," said Ethan Harris, an economist at Barclays Capital in New York. "These measures are really a measure to prevent a deeper recession. They're not going to stop a recession."

Many analysts expect the Fed to follow yesterday's emergency half-point rate cut with another reduction when policy makers meet at the end of this month.

The benchmark rate, which influences many other lending rates, now stands at 1.5 percent, the lowest since 2004. Analysts expect it to fall to 1 percent by the end of the year, one of the lowest levels in history. Lower rates stimulate the economy by encouraging consumers and businesses to borrow and spend.

The crisis has been compared by some economists to the beginnings of Great Depression, often blamed on a collapse of the financial system and the failure of the Fed to respond. Analysts said the conditions are nowhere near as bad as that period and the aggressive actions by the Fed and other central banks will prevent such a catastrophe.

"You may be depressed, but it ain't no Depression," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

The coordinated rate cut, which followed steep losses in overseas markets, is the latest in a series of extraordinary actions aimed at shoring up the teetering global financial system. Credit, which keeps the economy functioning, has nearly stopped flowing as financial firms refrain from lending to one another fearing counterparts might have large holdings of mortgage-related investments.

Large holdings of these assets, which have plunged in value along with the US housing market, have helped bring down several major financial companies, including Wall Street firms Lehman Brothers Holdings Inc. and Bear Stearns Cos., insurance giant American International Group Inc., and mortgage giants Fannie Mae and Freddie Mac. The crisis has spread internationally because many foreign firms invest in US mortgage-related assets.

Yesterday, the Fed, which earlier bailed out AIG with an $85 billion loan in exchange for an 80 percent stake in the company, said it would provide AIG up to an additional $37.8 billion to help the company avoid a cash shortage. AIG is to repay the Fed by selling off assets.

Some countries, including the United Kingdom, are reeling from the collapse of their own housing bubbles and the resulting stress on their banking systems.

Yesterday, the Bank of England joined the Fed in cutting rates by a half point while the British government unveiled an $87 billion bailout of its banks. The British government said it expected several banks, including the Royal Bank of Scotland, parent of Citizens Financial Group Inc. of Providence, to participate in the program, which aims to increase lending by injecting government money into the banks.

The Fed has taken several other actions to try to keep credit flowing, including pumping hundreds of billions of dollars into the financial system. Tuesday, it said it would buy commercial paper that corporations issue to obtain short-term loans to cover regular expenses, such as payroll. That credit market has nearly stalled.

Despite these efforts, financial markets remain in turmoil and the economy continues to slide. The Dow is on its longest losing streak since August 2007, the beginning of the crisis. The index has shed 35 percent in the past year.

In Washington, Treasury Secretary Henry M. Paulson Jr. pleaded for patience while the government puts the bailout plan into place. "The turmoil will not end quickly and significant challenges remain ahead," Paulson told reporters.

Analysts said yesterday's coordinated rate cut won't have a quick impact. It typically takes several months for rate actions to work their way through the economy.

"Economically speaking, this is a kumbaya moment of saying we're all in this together," said Rich Yamarone, director of economic research at Argus Research Corp. in New York. "You're going to see a continuation of unsettled markets until all these initiatives are allowed to work."

Robert Gavin can be reached at rgavin@globe.com.