More U.S. banks turn to Treasury
WASHINGTON (Reuters) - More U.S. banks lined up for government cash on Monday and the Group of Seven expressed concern that Japan's soaring yen currency posed a threat to financial and economic stability as recession worries spread worldwide.
Stock markets worldwide also tumbled again with key Wall Street indexes hitting a 5-1/2-year low.
Officials in Europe and Asia took emergency actions on Monday to shore up their financial positions. South Korea cut interest rates, Australia intervened in the currency market and the International Monetary Fund moved to help Hungary and Ukraine.
The credit crisis, which began with failing U.S. mortgages, has mushroomed into a worldwide rout as investors dump stocks and commodities, shun higher-risk emerging markets and seek out the safest government bonds and currencies.
Yet, promising signs emerged that government efforts to revive credit markets were beginning to pay off.
London interbank lending rates moderated and the U.S. Federal Reserve set the terms for its program to buy commercial paper, bolstering a market that is vital for funding companies' day-to-day business activities.
In the U.S. housing market, one of the sources of the global crisis, sales of newly constructed single-family homes rose in September and inventories shrank, as builders slashed prices to their lowest level in four years.
But U.S. stocks failed to sustain a midday rally as the Dow Jones industrials and S&P 500 fell to 5-1/2-year lows. Japan's Nikkei tumbled 6.4 percent to its lowest close in 26 years and Europe's FTSEurofirst 300 fell 1.7 percent to a 5-1/2-year closing low.
"It is so negative out there, you felt like a skater without any skates -- it couldn't stay up," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital in Baltimore.
"People right now are expecting the worst -- a total collapse of the hedge fund industry with half of them (hedge funds) not existing anymore. Moms and pops with 401(k)s are saying, 'I have had enough and don't want to be in there any more,'" Mata said.
Financial companies including Comerica Inc, SunTrust Banks Inc and State Street Corp agreed to sell stakes to the U.S. Treasury Department in exchange for cash infusions -- part of the $700 billion rescue plan approved by Congress earlier this month.
The U.S. government was also considering at least $5 billion in aid to facilitate a merger between hobbled auto makers General Motors Corp and Chrysler LLC, according to a source familiar with Treasury's thinking.
Loews Corp, a conglomerate run by the billionaire Tisch family, said it would inject up to $1.25 billion in new capital into its CNA Financial Corp commercial insurance unit after bad investments drove up losses.
The U.S. central bank is expected to trim short-term interest rates at its policy-setting meeting later in the week, and British Prime Minister Gordon Brown hinted that central bank action may be widespread.
European Central Bank President Jean-Claude Trichet said a rate cut next week was a possibility, though not a certainty.
MSCI's main world stock index dropped 4.3 percent, putting its year-to-date decline near 50 percent. Its emerging market counterpart lost 4.1 percent, and earlier hit a four-year low.
Oil prices earlier slipped below $63 per barrel, less than half the record high above $147 notched in July.
With financial markets in turmoil, the U.S. presidential election has focused on the economy, which has helped to push Democratic candidate Barack Obama ahead of Republican John McCain in opinion polls.
The election is next Tuesday, November 4.
COOLING THE YEN
Volatility has surged across financial markets as investors are forced to sell assets -- often bought with borrowed money -- to repay creditors or cover margin calls as asset prices fall and credit limits are breached.
The upheaval has also hit currency markets.
A brief G7 statement focused on the yen, fanning speculation the Bank of Japan would intervene in currency markets for the first time in four years.
"We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," said the group, which includes the United States, Japan, Germany, Britain, France, Italy and Canada.
The yen's rapid ascent against the dollar and euro is making Japanese exports much more expensive at a time when its overseas customers lurch toward recession.
The dollar, however, rose against major currencies, except the yen, so there was skepticism about whether any coordinated action on the currency would be forthcoming.
The Reserve Bank of Australia intervened in the currency market, buying Australian dollars for U.S. dollars in Europe.
FOR RICHER OR POORER
Mitsubishi UFJ Financial Group Inc, Japan's biggest bank, said it would raise up to $10.6 billion to replenish a capital base depleted by plunging stocks and its investment in Morgan Stanley.
In South Korea, the central bank resorted to a record interest rate cut as it grapples with the crisis that has shattered investor confidence and threatened a deep recession.
The 15-month-old crisis also continued to take a toll on emerging markets as investors withdrew funds and commodity exporters faced falling prices for everything from corn to copper.
The IMF said it reached an agreement with Hungary to provide a "substantial financing package" in the next few days that would include funding by the European Union and some individual European governments.
It agreed on a $16.5 billion loan for Ukraine on Sunday and last week unveiled a $2.1 billion package for Iceland.
In an effort to ease credit strains, the IMF's board is expected on Friday to consider a liquidity swap fund that would provide a group of pre-approved advanced emerging economies with short-term financing carrying few or no conditions.
(Additional writing and reporting by Claudia Parsons in New York, Jeremy Gaunt in London and Kevin Plumberg in Hong Kong; Editing by Steve Orlofsky, Brian Moss, Philip Barbara, Jeffrey Benkoe, Gary Crosse)