Treasury set to dish out financial rescue funds

The Treasury Department will start doling out $125 billion to nine major banks this week to get credit flowing again, giving a lift to U.S. markets on rising confidence that the government's moves would stave off a protracted recession.

Investors overseas were less assured, though. Stocks fell sharply around the globe.

Assistant Treasury Secretary David Nason said the deals with the nine banks were signed Sunday, and the government will make the stock purchases this week. The deals are designed to bolster the banks' balance sheets so they will begin more normal lending.

The action will mark the first deployment of resources from the government's $700 billion financial rescue package passed by Congress on Oct. 3.

The bailout package has undergone a major change in emphasis since it was passed by Congress. Treasury Secretary Henry Paulson decided to use $250 billion of the $700 billion to make direct purchases of bank stock, partially nationalizing the country's banking system, as a way to get money into the financial system more quickly.

The plan is also aimed at clearing banks' balance sheets of bad assets. That effort has yet to begin although the administration expects to use $100 billion to purchase bad assets in coming months.

The deployment of the first $125 billion to the major banks had been delayed while the government and the banks worked out the details for the purchases. Nason, a key architect of the rescue plan, said in an interview Monday on CNBC that those agreements had been signed late Sunday night.

Treasury is also starting to give approval to major regional banks with the goal of getting another $125 billion in stock purchases made by the end of this year.

KeyCorp, said Monday it would issue stock for a $2.5 billion infusion of capital from the government. SunTrust Banks Inc. also said it has received preliminary approval from Treasury for a $3.5 billion investment. In all, about 15 regional banks have received preliminary approvals for the government to make stock purchases.

Treasury said it was allowing each bank to announce its own deal once preliminary agreements were reached. Treasury will announce the final deals on its Web site each day once all the paperwork is completed and signed. By law, Treasury must announce the agreements within 48 hours after they are signed.

Treasury has given the go-ahead for stronger banks to use the money it receives in the rescue program to acquire weaker banks. That has prompted criticism the government should not be financing the consolidation of the banking system — in effect helping to choose winners and losers.

As fears mounted of a prolonged and deep worldwide recession, a juggernaut of selling swept across world markets Monday, stripping billions of dollars of wealth from people across the globe.

Major stock markets in Hong Kong, Tokyo, Britain, France and Germany slid, dragging down smaller bourses in emerging markets such as South Korea and the Phillipines. Tokyo's Nikkei 225 index closed at its lowest since October 1982.

But stocks rebounded on Wall Street. The Dow Jones industrial average started the day down nearly 90 points in the first few minutes of trading, but then stabilized, bolstered in part by a better-than-expected reading on new home sales and the Treasury announcement that the stock purchase program will begin this week. In early afternoon trading, the Dow Jones industrial average was up 125 points.

The Federal Reserve will begin a two-day meeting Tuesday and many economists expect it to cut interest rates — perhaps to their lowest point in more than four years — with the hope of relieving some of the economic pain felt by many Americans.

The Fed also began a major new initiative Monday to unclog frozen credit markets by purchasing commercial paper, the short-term loans that businesses use to fund their daily operations.

The market for commercial paper dried up after the bankruptcy of Lehman Brothers Holdings Inc. last month and other troubles in the global banking system. The biggest buyers of commercial paper are money market funds, some of which took big hits when Lehman collapsed.

The convergence of a housing collapse and a lockup in bank lending has created the worst financial crisis in more than a half-century.

With a recession seen as inevitable in the U.S., if not already under way, any Fed rate cut would be aimed at cushioning the fallout in the world's largest economy.

Vanishing jobs and shrinking paychecks have forced U.S. consumers to cut back sharply. Millions of ordinary Americans have watched their 401(k)s and other nest eggs shrink and the value of their homes drop, making them feel in even worse financial shape. In turn, businesses have cut back on hiring and other investments as customers hunker down and credit problems make it harder and more costly to get financing.

Not even China's mighty economy was immune to the rising recession anxiety. Its benchmark index slumped to its lowest level in more than two years as investors reacted to dismal earnings reports.

Currency markets were unnerved by a statement from seven leading industrial nations Sunday warning of the "recent excessive volatility" in the value of the Japanese currency, which is rising against the U.S. dollar toward the 90 yen level and near 13-year highs.

Dealers had one wary eye on central banks, watching whether they would intervene in currency markets to sell yen and prop up other currencies. The yen's rise threatens Japan's export-heavy economy by making its goods relatively more expensive.

Shares of top Japanese exporters Toyota Motor Corp. and Sony Corp. were hit hard Monday. The losses came despite a report that the government was considering a massive capital injection into struggling banks in a bid to calm jittery financial markets.

Investors fled to the safety of some types of government debt Monday. The price of gold — another traditional safe have in times of panic — rose.

Investors around the world seemed largely unimpressed by government efforts to help lift market sentiment. South Korea's central bank cut its key interest rate Monday by three-quarters of a percentage point, its largest-ever reduction. The country's stock market benchmark Kospi ended with a 0.8 percent gain.

Elsewhere, central banks in Australia and Hong Kong added funds to their markets to boost liquidity.

Companies start competing for bailout money

Insurers, automakers and American subsidiaries of foreign banks all want the Treasury Department to cut them a piece of the largest government rescue in U.S. history.

The betting is that many with their hands out will be successful, especially with financial markets in a stomach-churning dive and predictions the economy is about to tumble into a deep recession.

These groups argue that the credit squeeze is so severe and the risks to the economy so dire that their industries need financial support as well.

The Treasury is considering requests from a variety of industries, but has not decided whether to expand the program, officials said Saturday.

Lobbying efforts are intensifying.

The Financial Services Roundtable wrote Treasury officials on Friday requesting that the initiative to buy $250 billion in bank stock grow to cover insurers, auto companies, securities dealers and U.S. subsidiaries of foreign companies, including banks. The Treasury's plan is intended to bolster banks' tattered balance sheets and get them to resume making loans.

As the Treasury now interprets it, these additional groups would not participate in the bank stock program. They could receive help from a separate part of the $700 billion rescue that will buy bad assets from financial institutions.

Steve Bartlett, the president of the Roundtable, urged the Treasury to broaden the definition of those eligible for the stock purchase program.

"The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market," Bartlett wrote Neel Kashkari, the Treasury Department official running the bailout program.

Referring to U.S. subsidiaries of foreign companies, Bartlett said, "This is a global crisis and to not recognize the U.S. firms controlled by foreign banks or companies would create further impediment to the market's recovery."

A financial industry official said Treasury Secretary Henry Paulson met over the past week with various groups, including hedge fund managers, that were petitioning for assistance. The official spoke on condition of anonymity because the Treasury has not made a decision.

This official said the discussions with insurance industry executives were being held in advance of what are expected to be disappointing earnings reports by some insurance companies in the coming week.

The official said the insurance industry would like to get government purchases of their stock on a mandatory basis, duplicating the agreement Paulson struck two weeks ago with nine major banks.

Paulson pressured the big banks to go along with the program as a way of removing the stigma that might be attached to the payments if only a few major banks had received them.

Some insurers technically would be eligible for stock purchases now if they own subsidiaries that are savings and loan institutions regulated by the Office of Thrift Supervision.

Last month, American International Group, the country's largest insurance company, received an $85 billion loan from the Federal Reserve. Since then, it has gotten further support in an effort to withstand the biggest upheavals on Wall Street since the Great Depression.

Complicating the government's decision-making is that the Bush administration will not be in charge after Jan. 20. Paulson, who has said he has no intention of staying on the job, has pledged to consult with both campaigns on his bailout actions.

Democrat Barack Obama's presidential campaign said Friday it supported the effort by the auto industry to get money from the $250 billion made available for stock purchases. That would be in addition to $25 billion recently approved by Congress for low-interest loans to help the struggling industry retool and build fuel efficient vehicles.

The debate over expanding the bailout comes as the Treasury is rushing to get money out the door to the primary recipients: banks that sharply curtailed lending after suffering billions of dollars of losses on mortgage-related assets as home foreclosures soared in the housing slump.

Lawmakers are pressuring the Treasury to do more in the foreclosure area, as well.

Sheila Bair, head of the Federal Deposit Insurance Corp., told Congress about efforts to provide government-backed loan guarantees for mortgages that are reworked to help homeowners in danger of default. That would give banks an incentive to speed up refinancing efforts because the government would back part of the reworked loan.

The Treasury also is moving ahead to get bank stock purchases approved. It announced on Oct. 14 that it was spending $125 billion to buy stock in nine of the largest financial institutions. An announcement was expected Friday about a second round involving 20 to 22 other banks.

But it was decided each bank would announce its own agreements with the Treasury, out of concern that excluded banks could suffer a stock sell-off from disappointed investors.

PNC Financial Services Group Inc. announced Friday it was acquiring National City Corp. for $5.58 billion, in what was the first instance of a bank using fresh investments from the bailout program to make an acquisition. PNC said it had received $7.7 billion in cash through selling stock to the government under the program.