World Leaders Vow Concerted Action
Finance Officials Promise 'All Necessary Steps'; U.S. Stocks Flail to Worst Weekly Decline

By Steven Mufson and Glenn Kessler
Washington Post Staff Writers
Saturday, October 11, 2008

U.S. stock markets gyrated wildly yesterday as the world's top finance ministers met in Washington to hammer out a joint set of principles aimed at containing the financial crisis and restoring badly damaged confidence.

The Dow Jones industrial average fell 128 points, or 1.49 percent, to 8451, but during the day it had lurched from 7883 to 8901 -- a roller-coaster ride of more than 1,000 points and an indicator of the uncertainty gripping investors as they try to figure out the severity of the economic downturn and whether various companies will survive.

Over the past five days, the Dow Jones industrial average has registered the biggest weekly percentage decline in its 112-year history, surpassing the record decline set during the Depression, in the week ending July 22, 1933.

Finance ministers from the world's seven biggest industrialized economies, in Washington for a regularly scheduled meeting, issued a communique last night vowing to "take all necessary steps to unfreeze credit and money markets" and to "use all available tools" to prop up and prevent the failure of institutions critical to the financial system.

U.S. Treasury Secretary Henry M. Paulson Jr. confirmed earlier reports that the United States is drawing up plans to buy equity stakes in financial firms. He said federal money would be offered on a "standardized" basis to all banks in a way that would attract new private capital, as well.

The finance ministers' communique was designed to assure investors that world leaders would work in concert rather than at cross-purposes in forging measures to aid besieged financial institutions. It laid out common guidelines that endorsed the injection of capital into the banking system, the purchase of troubled assets from banks and broader guarantees of deposits. Europeans were also pressing for guarantees of interbank lending, though the Bush administration was reluctant to embrace the measure.

"The moral hazards have to be dealt with at a later stage. That's my sense," Christine Lagarde, France's minister of economy, industry and employment, said before the meeting of the Group of Seven, setting aside concerns about governments assuming private-sector risks. Lagarde added that the "functioning of the basic principles of our markets" has to be restored. "That is the main and first and top priority," she said.

Speaking in the Rose Garden yesterday morning, President Bush said the "startling drop in the stock market" was largely "driven by uncertainty and fear." But stocks continued to slide even after he pledged to "continue to act to resolve this crisis and restore stability to our markets." Bush tried to strike a balance between optimism that the administration's efforts would begin to show results and an acknowledgment of the economic stress in the country. "We all share a determination to solve this problem -- and that is exactly what we're going to do," he said.

Financial markets indicated that the world leaders were having little success so far.

While some of the world's biggest and most solid companies, such as General Electric and Toyota, have still been able to borrow money on an overnight basis for day-to-day operations at relatively low rates, for the most part short-term credit markets remained frozen.

Banks remained unwilling to lend money to one another and unable to raise money from investors, undercutting their ability to lend to customers. In a key indication of banks' difficulty raising money, the difference between the rate at which banks can borrow on credit markets and Treasury's borrowing rate was higher than it has been in at least a quarter-century.

The credit crunch has threatened to topple more banks. Regulators yesterday seized two small banks, Main Street Bank in Michigan and Meridian Bank in Illinois, bringing the year's tally of failed banks to 15.

Separately, Morgan Stanley battled rumors that the Japanese banking giant Mitsubishi UFJ might back out of its deal to inject $9 billion into the firm. Morgan Stanley's stock price plummeted more than 20 percent yesterday -- to less than a quarter of its value a month ago.

Stock markets fell broadly. At one point yesterday, the Dow Jones industrials fell below 8,000 for the first time since 2003. They had earlier crossed that level, on the way up, in October 1998. Stock markets also fell sharply abroad. In Japan, the benchmark index plunged 9.6 percent; in Britain, stocks tumbled 8.9 percent; in Germany, they fell 7 percent.

"What's been going on in the stock market in the last week or so has been the realization that the real economy can't function without functioning credit markets," said Steven Rattner, a managing principal of the Quadrangle Group, a large private investment firm.

The impact on consumers is widening. Interest rates on mortgage loans remain stubbornly high, in large part because Fannie Mae and Freddie Mac continue to pay inexplicably high prices to borrow money even though the two companies have been nationalized.

Major credit card companies are also reducing the amounts customers can borrow and raising interest rates and penalty fees. American Express typically reduces credit limits on about 4 percent of accounts each year; now the company is reducing limits on about 10 percent of accounts. Even the number of credit card offers shipped to American mailboxes has fallen about 15 percent since last year.

Businesses are getting hit, too. Capital One Financial said it would cut off the financing of the inventories of about 20 auto dealers in New York and New Jersey, dealing another blow to the reeling automobile industry.

Crude oil prices fell $8.89, to $77.70 a barrel, the lowest level in a year, on pessimism about the economic outlook.

The tremors being felt across the economy added a sense of urgency to the talks of the world's top finance ministers, a day before the regularly scheduled fall meeting of the International Monetary Fund and World Bank.

The finance ministers stressed their commitment to coordinating efforts to rescue banks.

"If there's one thing that's clear to me and clear to every member of the [Group of 20 industrial nations], it's that never have all of us been more dependent on each other and interconnected," Paulson said last night. "Growth or strength in any of these nations helps all of us; weakness hurts all of us."

"What will restore confidence is government intervention which is clear, comprehensive and cooperative among countries," said IMF Managing Director Dominique Strauss-Kahn. "The private sector cannot restore confidence on its own. Macroeconomic policy measures by governments will not restore confidence on their own. Piecemeal measures on financial markets will not restore confidence on their own." The finance ministers also pledged to rebuild the market for securitized assets, such as mortgages, that are blamed for sparking the financial crisis.

They said that each country was free to work within its own laws to implement the principles. "The actions should be taken in ways that protect taxpayers and avoid potentially damaging effects on other countries," the finance ministers said in their statement.

The pledge to prevent the failure of institutions important to the entire financial system was an implicit judgment that it was a mistake for the United States to have permitted the collapse of Lehman Brothers last month -- a move that many experts believe started the seizure in the credit markets.

"That decision has precipitated a series of events that have unfolded, that are unfolding and that have precipitated further additional and deeper financial crises," Lagarde said yesterday.

Many questions remain about how countries will implement the common guidelines.

Paulson said that Treasury's new plan for direct investment in banks was designed to "use taxpayer money more effectively, more efficiently." But people familiar with the Treasury deliberations said that many bank executives would fear that participation would be seen as a mark of weakness. Another approach under consideration is to issue federal guarantees on the debt banks sell to investors.

The British government combined the two approaches in a program announced this week, offering to guarantee the debt of any institution that agreed to raise its capital to a specified level by accepting a government investment.

The Bush administration has concluded that it has the legal authority to take all these steps, as well as the authority to insure all bank deposits. The Federal Deposit Insurance Corp. currently guarantees about 72 percent of bank deposits, but the ceiling could be raised if government officials decide it is needed to protect systemwide stability. Banking regulators, however, said they do not think that is necessary now.

Congressional leaders are pushing for another round of spending to protect jobs and stimulate consumer activity. House Speaker Nancy Pelosi (D-Calif.) plans to convene a summit Monday in Washington, where key lawmakers will discuss a new stimulus package with Harvard economist and former Clinton Treasury secretary Lawrence Summers and other budget experts.

Pelosi has said that she could call lawmakers back to Washington after the Nov. 4 election to approve a stimulus package of as much as $150 billion, or 1 percent of GDP. That would be far larger than anything lawmakers have considered since Bush signed a stimulus package worth $168 billion in February.

Staff writers Binyamin Appelbaum, Lori Montgomery, Dan Eggen, Peter Whoriskey, Frank Ahrens and Neil Irwin contributed to this report.