Monday February 23, 10:58 PM
Markets tumble as US unveils bank rescue details
WASHINGTON (AFP) - Global stock markets sank to fresh multiyear lows Monday after the US government unveiled details of a new aid plan for struggling banks but failed to ease deepening economic gloom.
The Dow Jones Industrial Average sank 3.41 percent to 7,114.78, crashing below its November bear market low and hitting its lowest close since May 1997.
The blue-chip index has fallen by nearly half since its record in October 2007 of 14,198.10.
The broad-market Standard & Poor's 500 index shed 3.47 percent to 743.33, its lowest finish since April 1997. The tech-heavy Nasdaq composite (NASDAQ: news) slid 3.71 percent to 1,387.72, its lowest level since November 2008.
Market action came as US authorities unveiled plans for a "capital buffer" for ailing banks but said the program would seek to avoid nationalization.
A joint statement from the US Treasury, Federal Reserve and banking regulators said the new lifeline being offered could lead to bigger government stakes but with a "strong presumption" that banks "remain in private hands."
Marc Pado, a stock analyst at Cantor Fitzgerald, said the market had hoped for more clarity on the Obama administration's plan to rescue the banking system.
"The market is still having trouble with the idea that we're not getting the clarity that its needs for the financial system," he said.
A joint statement from the US Treasury, Federal Reserve and banking regulators said the new plan could lead to bigger government stakes but with a "strong presumption" that banks "remain in private hands."
Amid the turmoil, Frankfurt's DAX (Xetra: news) stock index hit a four-year low, falling below 4,000 points for the first time since October 2004.
The DAX dropped 1.95 percent to close at 3,936.45 after losses on Wall Street. London's FTSE 100 index fell 0.99 percent to close at 3,850.73. In Paris the CAC 40 (Paris: news) fell 0.82 percent to 2,727.87 points.
Tokyo had sunk to a near four-month low, as trouble in the banking sector depressed sentiment.
Earlier, reports said the US government was in talks that could lead to it taking take a 25-40 percent stake in Citigroup (NYSE: C - news) after the launch of the new aid program Wednesday.
Some analysts said the market was confused about the handling of the nationalization debate by the administration of President Barack Obama.
Robert Eisenbeis, an economist at Cumberland Advisors, said the administration "has gotten itself trapped" in a debate on nationalization even as it increases control of the sector.
"Once you have government ownership, it is hard to say that doesn't constitute a form of nationalization," Eisenbeis said.
"Once the government money is in there, government can start to call the tune on policies, salaries. I think a lot of this debate is semantics."
Eisenbeis and some others argue that the government should use the regulatory process to shut down insolvent banks instead of trying to prop them up.
Princeton University economist and Nobel laureate Paul Krugman agreed, saying that "the only reason (some banks) haven't already failed is that the government is acting as a backstop, implicitly guaranteeing their obligations. But they're zombie banks, unable to supply the credit the economy needs."
Concern for the financial sector was rife elsewhere, meanwhile.
A meeting of top European leaders on Sunday, held in preparation for a G20 summit in April, was strong on promises to tighten global regulation in financial markets.
Leaders from Britain, France, Germany, Italy, Spain and The Netherlands, preparing for the global crisis session of Group of 20 (G20) countries in London, stressed the importance of tightening rules covering financial markets.
British Prime Minister Gordon brown spoke of a doubling of funding for the International Monetary fund to 500 billion dollars, and of a global "New Deal."
Markets were also watching closely the economic situation in eastern Europe.
The increasingly severe effects of the crisis there and their repercussions on banks in western Europe had moved towards the center of radar screens in financial markets last week after a warning from Moody's credit rating agency.
World Bank president Robert Zoellick warned in remarks quoted in the Suddeutsche Zeitung newspaper on Monday that many banks in eastern Europe were undercapitalized and needed 120 billion euros (154 billion dollars) from the West.
"Markets are unsettled by two fears right now: the nationalization of US banks and the financial crisis hitting Eastern Europe," said Ryohei Muramatsu, manager of Commerzbank (Xetra: 803200 - news) 's Group Treasury Asia in Tokyo.
Canadian Prime Minister Stephen Harper said the United States must fix its cracked financial system if Canada and the rest of the world are to recover from recession.
"We're obviously all hugely worried about the American financial system and about the financial system of some other countries," Harper said in an interview with US broadcaster Fox News.
"Frankly, until that problem gets fixed, it's hard for me to see how we're going to turn the corner on this recession that we're in now."
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