EU Leaders First to Back Banks

Oct. 12, 2008 -- All over the world this weekend, leaders raced to come up with a way to prevent another worldwide stock market nosedive Monday morning.

Late today in Europe, leaders came up with an emergency plan to rescue their banks, infusing them with cash in the hopes that they'll start lending again.

"It's not a matter of giving a gift to the banks," said French President Nicolas Sarkozy, defending the move.

A similar move was gaining steam in the United States, where former Treasury Secs. Lawrence Summers and James Baker appeared on ABC News' "This Week" with George Stephanopoulos to voice their support for the government's buying equity in the banking sector.

"This is bigger than the private sector can fix by itself. Government is going to have to restore financial stability to our markets and to our economy," Baker said in an exclusive interview with Stephanopoulos.

"And frankly, I think they have ... taken some pretty good steps already," he said.

But without Asia and the United States yet on board with a plan that compares to Europe's, some market watchers and economists are worried.

"I'm not sure it's going to be enough," New York Times columnist Andrew Ross Sorkin told ABC News' Bianna Golodryga. "I think what we really wanted was to see this concerted plan, and this global plan. Anything short of that is going to have people on edge. And in this market, fear is ruling the day."

The Bush administration has not yet signed onto a global plan. But it is radically re-thinking its own rescue plan.

Earlier in the week, Treasury Secretary Henry Paulson proposed that the federal government inject money directly into the banks and assume partial ownership.

"We've got a problem of trust. Financial institutions trusting each other. The whole economy trusting the government policy framework. And any time you have a problem of trust, you got to deal with it in a very aggressive way," Summers explained when asked about the need for a global coordinated action plan.

White House spokesman Tony Fratto said Bush acknowledged that the economic problem began in the United States, but told participants in an emergency Group of Seven meeting, "We're all in this together."

Bush said his administration was doing everything in its power to stave off the biggest market disruption since the Great Depression.

And while discussion of the financial crisis dominated at the G7, talk shifted today to the World Bank and its policy setting committee and concerns about how the fallout would affect developing and poor nations.

As a result of the downturn, developed countries are not expected to help 28 countries facing twin shocks of rising food and fuel prices, said former U.S. diplomat and trade negotiator Robert Zoellick.

"For the poor, the costs of the crisis could be lifelong," he said.

How Will the Markets Respond?

Market analysts hoped for a better week on Wall Street in response to the increasingly aggressive bailout package and particularly to moves in Europe to shore up banks.

"There is probably a lot of optimism based on this past Friday. So the markets may reflect the disappointment of the G7 not coming out with some profound, coherent, exact, precise program," said Wall Street Journal Washington, D.C., bureau chief John Bussey. "They are for making sure there is enough capital in the system freeing up money markets; assuring that bank deposits are safe; getting banks lending to each other again and lending to individuals. My suspicion is that as the week wears on, the markets will metabolize that and be a little more encouraged."

UBS Securities floor trading director Art Cashin said today on "This Week" that the bulk of the problem can be attributed to Lehman Brothers' collapse.

"In hindsight it's pretty clear that it was a drastic error to let Lehman go under, it spilled over into the money markets after that, when the money markets froze up they stop buying commercial paper, which is the lifeline for much of American business," he said. "The stock market is merely the sideshow in this circus, it is the financial system that's there -- to use a different metaphor, we're just the thermometer, it's the patient, it's the banking system that's got to get put back together and it's got to get put back together fast."

Sorkin said the fact that the bailout plan is changing swiftly is bound to be unsettling for investors.

"What started with a $700 billion rescue bill to buy bad assets from financial firms, has now morphed into a plan allowing the government to take partial ownership in those firms, partially nationalizing private banks," Sorkin said. "That's an idea the administration opposed at the start of the crisis.

"In a way, the $700 billion plan was very clear until last week. Once the market started tanking, all sorts of uses for the $700 billion plan started arising. And everyone now has a different idea on how to use that money. So I think that there is a real question about how to use that money and whether that's gonna get things kick started again."

But amid all the panic, some optimism is starting to emerge. Stocks in strong companies have also been brought down by this crisis and some investors see a buying opportunity.

"If you have a long time horizon," Sorkin said, "I think the problem is in this environment everyone is looking at their account literally on a day-to-day, almost hour-to-hour basis. And so if you can stomach it, this is the time to be investing, because this is when people make money."

Soros Backs Plan to Buy Equity in Banks

In an appearance on "World News," billionaire investor and philanthropist George Soros expressed cautious optimism for a reversal of fortunes.

"I'm afraid that a lot of time has been lost and a lot of altitude has been lost," Soros told ABC News' Dan Harris. "But eh, I think that if they announce a coherent plan now and if they also act -- and I think they probably need to take action on Morgan Stanley right away -- then I think the market will stabilize and they will have time to implement the scheme."

Soros said getting money to banks would have cascading benefits for the economy.

"Well, putting money at the level of the capital injection is much more high-powered money, because you only need to maintain 8 percent capital for your balance sheet," Soros said. "If you're putting money at the level of the balance sheet, you, you know, need to put in 100 percent. Here you only need to put in 8 percent. So $700 billion would be sufficient to recapitalize the banks, but it wouldn't be sufficient to take off their hands all the bad stuff that they've accumulated.

"In addition, if you make the terms right ... then I think you could attract private capital. Existing shareholders and giving them rights to subscribe, which they could sell to others. Other investors, to come in, and you may not even need taxpayers money for this.

"I think that also the European governments realize that they have to fix their system. And, you know, when you go to the brink as we are right now, then something happens to pull you back. Because the alternative of allowing this to continue is so horrendous that even people who don't want any government intervention realize that such intervention is necessary."

Shockwaves Around the World

The bad news out of Wall Street continued to reverberate worldwide over the weekend. The Asian markets, which were first in the world to open, got off to a bad start this Monday, according to ABC News' Stephanie Sy.

On Friday, indexes in South Korea, Singapore, and Hong Kong plunged to their lowest levels in years. But Japan's Nikkei index was the worst hit, losing nearly a quarter of its value last week. Investors expect a U.S. slowdown to trigger an economic downturn in Asian countries, which depend on U.S. consumers to buy their exports.

Russia suspended trading on both of its stock exchanges yet again on Friday, Clarissa Ward reported from Moscow, as markets around the world continued to plummet. Because Russia is largely a commodities-based economy, it is suffering enormous losses as commodity prices, particularly oil, continue to fall. The Russian government says on Monday it will invest nearly $7 billion into Russian stocks, that's part of a wider financial rescue package totalling more than $200 billion.

Perhaps the one bright spot?

In Baghdad, prices on the Iraqi Stock Exchange were actually rising, John Hendren reported. The Iraqi stock index is up 25 percent for the year, and bank stocks aren't tumbling here because there's no mortgage crisis, for the simple reason that Iraqis pay for their homes in cash.