Financial Markets React to Intervention; U.S. to Take Stakes in Banks

Stock markets around the world kept up their end of the bargain as massive buying sparked a global equity rally on news that world governments were throwing trillions at the credit freeze gripping financial markets. The U.S. also detailed a plan early Tuesday to invest some $250 billion in banks.

It was just one of those Mondays on Wall Street – the Dow soared 936 points to close at 9,388, a gain of 11.1 percent. The broader markets also experienced huge gains, with the Nasdaq climbing 195 points to 1,844 – an 11.8 percent surge – and the S&P 500 rising 104 points to 1,003, up 11.5 percent.

General consensus said that the Dow’s jump was a reaction to steps of support by leading governments for the global banking system.

Another of those steps was announced Tuesday when the U.S. Treasury Department said it will take equity stakes in banks through the power given to it by the bailout plan.

Secretary of the Treasury Henry Paulson said that the government would invest $250 billion in banks to encourage them to begin lending again. Paulson said nine banks have already requested government capital. The government will receive senior non-voting preferred shares and warrants to purchase common shares in return for the capital.

Banks will receive the investments by request. In order to qualify, the investment must be at least 1 percent of risk capital and not exceed $25 billion for any one bank. Banks must apply for investment by November 14.

Treasury noted that it will invest in only “healthy” banks.

Federal Reserve Chairman Ben Bernanke took to the media to explain the investment plan. In an op-ed in Tuesday’s Wall Street Journal, Bernanke said that “clearly the time had come for a more comprehensive and broad-based solution” to the recent financial upheaval.

In a letter addressed to Paulson, Edward Yingling – president and chief executive officer of the American Bankers Association – approved of the action, saying “Troubled banks that have taken significant capital hits, causing them to refrain from new lending as they rebuild their capital position, might benefit from a temporary infusion of capital investment.”

Meanwhile, France, Germany, Spain, the Netherlands and Austria agreed to a commitment of $1.8 trillion to guarantee interbank loans and take equity stakes in banks.

Panic seemed to dominate over the weekend leading up to the historic Monday on the markets. The most far-flung comments included a statement by the Prime Minister of Italy Friday that said world leaders were thinking about shutting down financial markets; an hour later, he retracted the statement.

Stock markets in the U.S. opened higher in trading Tuesday before sliding into slightly negative territory at midday.