By Patrick M. Fitzgibbons
NEW YORK (Reuters) - The U.S. government pledged $50billion (27.3 billion pounds) to guarantee money-market mutualfunds, curbed short-selling and crafted a sweeping plan to mopup toxic mortgage debt, sending global stock markets soaring onFriday.
The moves capped a week in which financial markets facedtheir most serious confluence of crises in decades andthreatened the stability of national economies and the globalbanking system.
As the U.S. government brought out the big guns to tacklethe mounting financial crisis, investment bank Morgan Stanleybought itself some time to come up with a plan for its futureand continued talking to Wachovia Corp and other banks about amerger.
But much of the markets' focus on Friday was on Washington,as officials from President George Bush's administration,Congress and the Federal Reserve worked to craft a number ofplans to restore confidence in shaken stock markets.
In the most recent example of a government entity steppingin to ease fears, the U.S. Treasury said on Friday it will use$50 billion to back money-market mutual funds whose assetvalues fall below $1 in another step to contain ragingfinancial turmoil.
Government officials said they had more work to do. Thetoxic-debt plan, still being crafted, is expected to costhundreds of billions of dollars.
"We must now take further, decisive action to fundamentallyand comprehensively address the root cause of our financialsystem's stresses," Treasury Secretary Henry Paulson said at apress conference. "The federal government must implement aprogram to remove these illiquid assets that are weighing downour financial institutions and threatening our economy."
U.S. stocks soared on the plans as the Dow Jones industrialaverage was up more than 334 points to 11,354 and the Nasdaqrose about 60 points at 2,260.
"It's all part of the program to restore confidence infinancial markets. They are absolutely petrified of just a runon financial assets and they came very close to that onThursday," said Boris Schlossberg, director of currencyresearch at GFT Forex in New York. "At this point they havejust decided that fiscal responsibility goes out the door andanything and everything that needs to be shored up financiallywill be done."
UK lender HSBC Holdings walked away from a $6.3 billiondeal for control of Korea Exchange Bank, fuelling speculationit may be turning its attentions to its embattled rivals in theWest.
And the Eurozone's largest bank, Spain's Santander,declined to comment on a media report it was eyeing Bank ofIreland, which has been pummelled by a property market slump athome.
After the Financial Services Authority imposed a four-monthban on short selling financial stocks on Thursday, the U.S.Securities and Exchange Commission followed suit on Friday withan immediate 10-day ban.
French regulator AMF said it was also talking to otherEurozone regulators about market dealings, leading toexpectations that the ban would snowball.
Meanwhile the world's central banks redoubled their effortsto lubricate the seized-up money markets. Japan, Australia,India and Indonesia pumped in $42 billion after the U.S. Fedcoordinated a $180 billion package a day earlier.
In Europe, there were signs that the stress was easing. Thecost of borrowing dollars overnight fell back toward the Fed's2 percent target, and three-month borrowing costs slid. TheBank of England offered $40 billion to banks, but only half ofit was taken up.
TOXIC-DEBT PLAN
Washington's proposal to draw the poison from banks'mortgage assets and the first of the short-selling bans had animmediate and dramatic effect.
U.S. stocks clocked big early gains and while the price ofgold and government bonds, traditional safe havens in times ofturmoil, both fell.
Battered U.S. financial shares also showed some life onFriday as Wachovia rose 30 percent, Washington Mutual rose 25percent and Merrill Lynch rose 22 percent.
Paulson and Federal Reserve Chairman Ben Bernanke plan towork through the weekend with Congress on a plan to deal withthe toxic bank assets that have been choking the financialsystem for a year.
"This is a more substantial and systemic solution than thead hoc interventions we have seen in recent days," said DariuszKowalczyk, chief investment strategist at CFC Seymour.
"At present, confidence is the most important factor, andthis will only be maintained if the rescue plans are deliveredon both sides of the Atlantic," said Andrew Turnbull, seniorsales manager at ODL Securities.
The MSCI index of regional shares excluding Japan rose 7percent and Tokyo stocks ended up 3.8 percent. The Shanghaiindex roared 9.5 percent higher after China stepped in with areform package to halt a 69 percent slide from last October'srecord high. In Europe, all the continent's major marketsjumped..
MORGAN STANLEY
Sovereign wealth fund China Investment Corp (CIC), MorganStanley's largest shareholder, was said to be in talks to raiseits stake to as much as 49 percent from its current 9.9 percentthat it paid $5 billion for in December, sources familiar withthe matter said.
Beijing is wary of adding to its Morgan Stanley holding,given that its existing holding is carried at a steep loss --the whole bank was only worth $24 billion at Thursday's close.An unidentified CIC official told the Xinhua news agency thatan increase in the stake would face U.S. political obstacles.
However, on Friday morning, a senior CIC official, quotedby the official Xinhua news agency, said Wall Street's tworemaining stand-alone investment banks, Morgan Stanley andGoldman Sachs, were capable of tackling their problems on theirown.
Morgan Stanley declined to say it was in talks, but aspokeswoman confirmed it was "focused on solutions" to addressits falling stock price.
GOVERNMENT ACTION
A U.S. fund to deal with bad mortgage-related assets wouldbe similar to the Resolution Trust Corp, which was set up toclean up bad debts from the savings and loan crisis in the late1980s at a $400 billion cost to taxpayers.
"We talked about a comprehensive approach that will requirelegislation to deal with illiquid assets on financialinstitutions' balance sheets," Paulson told reporters.
According to two Congressional aides, he has been shoppingaround a plan to create the fund.
Rep. Barney Frank, who is chairman of the House FinancialServices Committee, said there was concern that establishing aformal entity to buy the assets would take too long.
"I think it will start to provide a floor to asset valuesand allow institutions to work through this in a systematicmanner. They won't have to rush into the arms of suitors toavoid collapsing," said Haag Sherman, co-founder and managingdirector of Salient Partners in Houston.
The financial crisis spilled into the U.S. presidentialrace as Republican Sen. John McCain said the Federal Reserveshould "get out of the business of bailouts" while Democraticcandidate Barack Obama said he supported efforts to shore upthe financial markets' confidence and would hold off frompresenting his own economic recovery plan.
(Additional reporting by Kevin Plumberg, Jeff Mason andLucia Mutikani; Additional writing by Tony Munroe and WillWaterman; Editing by Jeff Benkoe, Dave Zimmerman)
