By Daniel Trotta
NEW YORK (Reuters) - The United States weighed taking an equity stake in banks ahead of a G7 meeting of economic powers to try to ward off world financial ruin.
With U.S. stocks turning negative on Thursday after emergency interest-rate cuts by central banks around the world, investors were still calling on politicians from the G7 and European Union to show they can cooperate more effectively.
The Dow, the Nasdaq and the S&P 500 all failed to hold onto early gains, diminishing hope Wall Street would end a six-day losing streak in which share prices have fallen almost 15 percent.
European stocks went flat after trading higher much of the day.
Major central banks including the U.S. Federal Reserve coordinated interest-rate cuts on Wednesday, with South Korea and Taiwan following suit on Thursday. Japan was considering further measures in the face of new recessionary signals.
Finance ministers and central bankers from the Group of Seven major industrial nations will meet in Washington on Friday with the chance to take concerted action.
Acting piecemeal, they have rescued banks, injected massive amounts of liquidity into the markets, agreed to take toxic debt off the books of financial institutions and now, in unison, have slashed interest rates in the face of the greatest financial crisis since the Great Depression.
That has raised the question of what options remain to combat the market meltdown, which has destroyed lenders from Wall Street to Iceland to Germany and left people worried about the security of their savings and jobs.
Policy-makers want to free up credit but have yet to overcome the lack of confidence that has virtually halted lending between banks. The interbank cost of borrowing overnight cash fell on Thursday but longer-term funding costs stayed high.
"The rate cuts are a good step in the right direction to stop the bleeding, but this won't be enough. European governments have to act swiftly and decisively together," said Rik Zwaneveld, trader at AFS Brokers, in Amsterdam.
TREASURY AS SHAREHOLDER?
Treasury Secretary Henry Paulson, speaking to reporters on Wednesday, stressed that the recently approved $700 billion financial bailout bill gave him wide authority to inject capital into the banking system, and he said he would not rule out having Treasury take an ownership position in banks if necessary.
The bank recapitalization plan was an option included in the $700 billion rescue plan approved last week in which the U.S. Treasury will buy bad loans from financial institutions in the hope that it will jump-start lending.
Equity stakes, still in its preliminary stages, has emerged as one of the preferred options being discussed in Washington and on Wall Street, The New York Times reported, citing unnamed U.S. officials.
The United States would be following the lead of Britain, which said on Wednesday it was prepared to inject 50 billion pounds ($87 billion) of taxpayer money into its banks and guarantee interbank lending.
After getting hammered on Wednesday, British banking shares recovered on Thursday with HBOS up 35 percent and Royal Bank of Scotland up 15 percent.
British Prime Minister Gordon Brown urged the G7 and EU to guarantee lending between banks, in line with measures Britain has introduced domestically.
However, EU states remained divided over the need to set up a financial supervisor with responsibility across Europe, and Paulson said a one-size-fits-all approach may not be right for members of the G7.
"When you look at the G7 we have very different countries, economies of different sizes, financial systems with different needs, and so I think it would not make sense to have identical policies," Paulson told reporters on Wednesday. "The key thing is that we continue to work closely together, we continue to communicate, we continue to coordinate."
U.S. markets face additional uncertainty after a ban on short-selling of financial stocks expired at midnight on Wednesday.
Short-sellers bet on falling stock prices and have been blamed for driving share prices lower, though advocates of the tactic say they were first to point out underlying weakness in financial firms.
U.S. equities got a boost from a surprise earnings announcement by IBM after the bell on Wednesday in with the world's largest computer services company posted higher-than-expected profits.
Emerging markets steadied on Thursday after absorbing much of the blow on Wednesday, when Mexico and Brazil intervened in the currency markets.
(Reporting by Reuters bureaus around the world; Editing by Steve Orlofsky)
