World Governments Get Into the Banking Business

Market jumps on news that Europe and U.S. plan to buy direct shares in banks.

Oct. 13, 2008 — -- The Dow Jones industrial average jumped 400 points in the first minutes of trading today on talk of a unified effort from the United States and European governments to pump money into failing banks to loosen credit lending.

The Bush administration said it is exploring ways for the U.S. Treasury Department to buy up shares directly from some banks, a notion that was at first rejected by Treasury Secretary Henry Paulson when Democrats in Congress floated the idea weeks ago.

Global markets are also reacting positively to an announcement by British Prime Minister Gordon Brown this morning that the government will take partial ownership of at least four major British banks, pumping up to $70 billion into them. France, Germany, Italy and Japan are considering similar steps.

Now, the U.S. Treasury believes this cash infusion into banks could kick-start credit markets again.

"By taking this direct step, by essentially giving banks cash and taking a stake in the bank and showing that the government is behind the bank, the idea is that you have confidence again," said John Bussey, the Washington bureau chief of the Wall Street Journal. "If you're a bank to lend to another bank and perhaps to another business, and credit starts flowing again through the system. So that's the Treasury's idea."

The government has to move quickly to figure out the mechanics of the plan, Bussey said, because the markets are surging based on the expectation that the money is coming. If a plan doesn't come together in the next day or two, the stock market could tumble again.

But the question of whether these short-term gains will translate into long-term relief remains unanswered.

"The first thing to watch is what happens to Morgan Stanley," Andrew Ross Sorkin, the New York Times financial columnist, said today on "Good Morning America." "I think everyone's thought that that's the next domino to fall, the next Lehman Brothers, if you will. What happens to them [Morgan Stanley] Monday morning is going to be a very big barometer."

Morgan Stanley seems to have avoided Lehman Brothers' fate, at least for now. Mitsubishi UFJ Financial Group announced today that it was investing $9 billion into Morgan, giving the Japanese financial company a 21 percent ownership interest in the U.S. firm.

Future of Financial Markets

"Where do we see the $700 billion program really being used? How is it being used? To fortify the banks? To fortify mortgage prices? A combination of the two? And how will that play out? We probably will know by midweek where things are headed," Sorkin said.

Bussey said that if the government plan does not work, the country faces a "deep and long recession."

Mellody Hobson, president of Ariel Capital Management and a "GMA" financial contributor, said she is optimistic about the future, because now is the perfect time to buy stocks.

"Prices are so low, so cheap, we haven't seen these valuations in 25 years," Hobson said.

"The greatest investor of all time, Warren Buffet, has said, 'It's important to remember, you have to be greedy when others are fearful and fearful when others are greedy.'"