WASHINGTON — Putting more meat on the bones, the U.S. Treasury Department early Monday outlined its strategy for halting a widening financial crisis as markets in Asia and Europe rebound amid aggressive overseas government action.
The news rallied stock markets in the U.S. and abroad pummeled by last week's massive losses. The Dow Jones Industrial Average posted its biggest one-day point gain ever, soaring 936.42 points, or 11 percent, to 9387.61.
Treasury's new point man for the bank rescue program, Neel Kashkari, gave his first address on Monday, laying out just how the agency will carry out a $700 billion rescue plan passed by Congress last month. He confirmed taking equity positions in struggling banks is near the top of the list.
"We are designing a standardized program to purchase equity in a broad array of financial institutions," said Kashkari, said in remarks prepared for delivery. "As with other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capital."
The idea behind an equity purchase program is to help banks rebuild capital in a period where banks are not lending to each other or corporate America. The Federal Reserve has made massive amounts of short-term emergency loans available to help banks keep cash on hand as investors lose confidence in the banking system.
Kashkari also spelled out that Treasury will look at helping the distressed mortgage markets in two ways. Treasury will purchase the complex mortgage bonds that have been contaminating bank balance sheets, most likely in a reverse auction process where bids go down as banks compete to unload bad assets. And Treasury now contemplates buying whole loans, that is loans that have not been pooled into mortgage bonds and sold into a secondary market. Whole loans, said Kashkari, are clogging up the balance sheets of some regional banks and Treasury looks to help these financial institutions too.
And while most of America slept, the Fed issued a 2 a.m. statement announcing it had entered into an agreement with the Bank of England and the European Central Bank, Swiss National Bank and the Bank of Japan. These four central banks will work with the Fed to provide short-term U.S. dollar funding by auctioning off emergency loans with fixed interest rates that have maturities of seven, 28 and 84 days.
This measure seeks to make available to foreign banks the same sort of short-term lending that the Fed has engaged at home in since springtime. These short term loans are designed to spur more inter-bank lending, which has frozen up, causing the no famous credit crunch.
Treasury's clarifications and the Fed's new language come a day after European leaders and Great Britain announced an aggressive plan to pour billions into guaranteeing loans between banks for periods of up to five years. They also announced they would take stakes in large, important banks to ensure their survival and restore confidence in the banking system.
With a vow to be a "rock of stability" for an evolving international fiscal rescue plan, British Prime Minister Gordon Brown vowed Monday to pump as much as $63 billion into England's three largest banks.
Moving swiftly to re-assure jittery stock markets worldwide, Brown unveiled details of a larger-than-expected proposal to, in effect, partially nationalize England’s major banks.
The move comes as leaders across the globe are working swiftly to prevent a second straight week of record stock market losses that could plunge the world into a paralyzing recession.
"We've taken unprecedented action today," said Brown.
In coordination with England, France and Germany were moving forward with fiscal rescue plans of their own. German Chancellor Angela Merkel was expected to unveil a nearly $540 billion rescue plan and French President Nicolas Sarkozy planned an emergency cabinet meeting to embrace a similar plan.
The initial response from world markets was positive. Asian and European stock markets rose about 6 percent in early trading on Monday, an important vote of confidence that gives the financial deals time to take hold.
"The government cannot just leave people on their own to be buffeted about," said Brown in announcing the plan. "We must, in an uncertain and unstable world, be the rock of stability upon which people can depend."
In the most significant element of the Brown plan, the British government could end up as the majority stakeholder of the Royal Bank of Scotland Group PLC. If, as expected, RBS can't raise enough private investment to stabilize, the British government will inject as much as $20 billion into the bank in exchange for nearly 60 percent of its stock.
Britain could pump nearly $30 billion into Lloyds TSB and HBOS – two UK banks in the process of merging. In return, Brown's government would receive a 40 percent stake in the bank.
As part of the shake-up, RBS chief executive Fred Goodwin resigned and Brown announced limits on bank bonuses to ensure taxpayers that financial managers would not be rewarded for their catastrophic missteps.
"To let the chips fall where they may would be the height of irresponsibility," Brown said. "It would be a failure of leadership precisely at the moment when vigorous action is needed to protect people who need that help most."