By Jonathan Stempel
NEW YORK (Reuters) - Bank stocks soared on Tuesday after the government set plans to inject $250 billion into the battered sector, where exposure to toxic mortgages and other debt has pummeled investor confidence and share prices.
Nine major lenders agreed to accept the preferred stock investments, which are limited to $25 billion per lender. The injections come as regulators worldwide scramble to unfreeze a financial system paralyzed by worries over capital, liquidity and the potential for a global economic recession.
"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."
The 24-member KBW Bank Index <.BKX> rose as much as 13.6 percent and was up 9.7 percent in early afternoon trading. Credit spreads on lenders' debt also tightened, suggesting that investors perceive less risk of default.
Bank of America Corp
Merrill Lynch & Co
"In recent weeks, the American people have felt the effects of a frozen financial system," U.S. Treasury Secretary Henry 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 taxpayer-funded bailout package that President George W. Bush signed into law earlier this month.
UNCLOGGING THE SYSTEM
"Hopefully, this strong approach is the dynamite needed to blast through the clogged-up financial system," said Sen. Chuck Schumer, a New York Democrat.
New York is home to six of the nine initial recipients of the capital injections.
Separately, the Federal Reserve set plans to begin buying large amounts of short-term debt starting on October 27.
The Federal Deposit Insurance Corp, meanwhile, 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.
Regulators in Europe have pledged more than 1 trillion euros ($1.37 trillion) in direct capital injections for banks on that continent, and to help underwrite lending.
"We will be looking today to an absolute sea change in the global financial system in terms of liquidity," Stephen Schwarzman, chief executive of the private equity firm Blackstone Group LP
Moody's Investors Service analysts Gregory Bauer and Robert Young said the $250 billion is equal to about one-fourth of all equity capital of the U.S. banking system. "This is a massive amount of fresh capital that now is reliably available to restore the health of the firms' balance sheets," they wrote.
Citigroup analysts, meanwhile, raised ratings for 14 U.S. banks to "buy" from either "hold" or "sell."
DAMAGE ALREADY DONE
But the capital injections do not free banks from problems tied to mortgages, consumer and business credit, and illiquid debt expected to persist well into 2009 or longer. Through Monday, the KBW index was down 37.3 percent this year.
"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."
Analysts expect JPMorgan and Wells Fargo to report lower third-quarter results on Wednesday. Most major U.S. lenders are scheduled to report quarterly results by the end of next week.
In afternoon trading, Bank of America shares rose 15.7 percent to $26.37; Citigroup rose 16.9 percent to $18.41; JPMorgan fell 1.7 percent to $41.26; Wells Fargo rose 9 percent to $33.14; Goldman Sachs rose 12 percent to $124.32; Morgan Stanley rose 20.4 percent to $21.79; Bank of New York Mellon rose 6.1 percent to $32.56; Merrill Lynch rose 18.1 percent to $20.81; and State Street rose 16.4 percent to $56.28.
(Additional reporting by Lynn Adler, Leah Schnurr, Walden Siew, Daniel Trotta and Ryan Vlastelica in New York; Mark Felsenthal, David Lawder, Jeremy Pelofsky and Tabassum Zakaria in Washington; and Megan Davies in Dubai; editing by John Wallace)
