-- Markets reacted tepidly Tuesday to the U.S. government's historic plan to purchase stakes in banks — including nine of the USA's biggest — as stocks fell modestly and credit markets loosened a little.
Some took comfort from that result. "There seems to be a growing consensus that the policy initiatives are going to work — not if, but when," says Quincy Krosby, The Hartford's chief investment strategist.
Stock investors initially cheered the $250 billion plan, sending the Dow Jones industrial average 405 points higher in early trading. But the rally fizzled. The Dow ended down 77 points at 9311. Anticipation of the plan on Monday drove the Dow to its biggest-ever point gain, adding 936.
The U.S. action, which followed similar European measures, is intended to jump-start stalled bank lending. Initial credit market reaction was mildly positive. The three-month London Interbank Offered Rate, or LIBOR, a measure of how much banks charge each other for dollar loans, fell 0.12 percentage points, its largest one-day drop since March 17. But at 4.64%, it remains unusually high.
The decision makes taxpayers part owners of some of the top names in American finance, including Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America (and soon-to-be-acquired Merrill Lynch), Citigroup, Wells Fargo, Bank of New York Mellon and State Street.
"This is an essential short-term measure to ensure the viability of America's banking system," President Bush said in a Rose Garden announcement before markets opened in New York.
Bush described the purchase of non-voting shares as "limited and temporary." The terms are designed to encourage the banks to repay the Treasury within five years. Along with providing new capital to the banks, the government also will use some of the funds from the $700 billion financial rescue package to guarantee bank debt and offer insurance for non-interest-bearing accounts — good news for businesses.
Both Bush and Treasury Secretary Henry Paulson made it clear they regarded the step as the financial equivalent of castor oil. "Government owning a stake in any private U.S. company is objectionable to most Americans, me included," Paulson said. "Yet the alternative … is totally unacceptable."
CEOs from the nine banks were summoned to a meeting Monday and pressed by Paulson to participate in the voluntary program. They accepted and will share an initial $125 billion outlay. An additional $125 billion will be available for smaller banks.