By Jonathan Stempel
NEW YORK (Reuters) - U.S. bank stocks soared on Tuesday after the government set plans to inject $250 billion into the battered sector, hoping to restore confidence after exposure to toxic debt pummeled share prices.
The non-voting preferred stock investments, limited to $25 billion per lender, come as regulators worldwide scramble to unfreeze a financial system paralyzed by worries over capital, liquidity and a darkening economic outlook.
Regulators in Europe have pledged more than 1 trillion euros ($1.37 trillion) in direct capital injections for banks and to underwrite lending between banks.
"This clearly adds an immense backstop against the prospect of the largest of the financials falling into capital inadequacy," said Gregory Miller, chief economist at SunTrust Banks Inc in Atlanta. "The kindest of us would suggest that it's a necessary evil."
In morning trading, the 24-member KBW Bank Index <.BKX> was up 10.4 percent, while the Amex Securities Broker-Dealer Index <.XBD> rose 3.3 percent.
U.S. Treasury Secretary Henry Paulson said nine "healthy institutions" had already agreed to accept capital injections.
The recipients include Bank of America Corp
Merrill Lynch & Co
"In recent weeks, the American people have felt the effects of a frozen financial system," Paulson said at a news conference. "Today's actions are not what we ever wanted to do, but today's actions are what we must do to restore confidence to our financial system."
Funds will come from the $700 billion bailout package that President George W. Bush signed into law earlier this month.
"Hopefully, this strong approach is the dynamite needed to blast through the clogged-up financial system," said Sen. Chuck Schumer, a New York Democrat. "Once that is accomplished, we must make sure that this new capital is used to strengthen traditional banking practices to get the economy going again."
New York is home to six of the nine reported initial recipients of the capital injections.
Separately, the Federal Deposit Insurance Corp said it will guarantee through June 30, 2012, new senior unsecured debt issued on or before June 30, 2009, and also back non-interest-bearing deposit accounts that businesses typically use. The Federal Reserve also set plans to begin buying large amounts of short-term debt starting on Oct 27.
DAMAGE ALREADY DONE
Citigroup analysts raised ratings for at least 14 banks to "buy" from either "hold" or "sell."
One of its analysts, Keith Horowitz, wrote that "in one action the Treasury has moved to address the greater issues of the day facing banks -- capital, liquidity in the form of depositor protection, and the ability to issue debt."
The injections, however, do not free banks from the mounting problems tied to mortgages, consumer and business credit, and illiquid debt that are expected to persist well into 2009, if not longer.
Through Monday, the KBW index was down 37.3 percent this year, and the Amex broker-dealer index had sunk 49.6 percent.
"There's been damage done," said Jim Awad, chairman of W.P. Stewart & Co in New York. "We'll see that when companies give their third-quarter results and provide fourth-quarter outlooks."
JPMorgan and Wells Fargo are expected to report lower third-quarter results on Wednesday, and Bank of America has said it expects earnings to slide 68 percent. Most major U.S. lenders are scheduled to report quarterly results by the end of next week.
In morning trading, Bank of America shares rose 13 percent to $25.77; Citigroup was up 13.7 percent to $17.91; JPMorgan fell 4.6 percent to $40.05; Wells Fargo rose 4.6 percent to $31.80; Goldman Sachs rose 8.3 percent to $120.23; Morgan Stanley rose 21 percent to $21.96; Bank of New York Mellon rose 9 percent to $33.44; Merrill Lynch rose 19 percent to $20.96; and State Street rose 11.65 percent to $53.92.
(Additional reporting by Lynn Adler, Leah Schnurr, Daniel Trotta and Ryan Vlastelica in New York, and David Lawder, Jeremy Pelofsky and Tabassum Zakaria in Washington; editing by John Wallace)
