Britain Commits $64 Billion to Prop Up 3 Banks Fed and ECB Join in Concerted Effort

By Landon Thomas Jr. and Alan Cowell

Alan Cowell reported from Paris. Mark Landler contributed reporting from Washington, Katrin Bennhold and David Jolly from Paris, and Julia Werdigier from London. Vikas Bajaj contributed reporting from New York and Carter Dougherty from Frankfurt.

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After a whirl of emergency weekend efforts on both sides of the Atlantic to combat financial turmoil, Britain committed more than $60 billion in taxpayers’ money Monday to prop up three banks while the U.S. Federal Reserve announced plans with other institutions to ease the banking crisis.

Before markets opened in Europe, a statement from the Federal Reserve in Washington said that it – along with the Bank of England, the European Central Bank and the Swiss National Bank – would provide funds at a fixed interest rate in advance of each operation “against the appropriate collateral in each jurisdiction.” The Federal Reserve said it would increase its swap lines with those central banks “to accommodate whatever quantity of U.S. dollar funding” institutions demand. The Bank of Japan was considering joining the plan, the Federal Reserve said in a statement.

The sweeping measures were adopted as Britain began to redeem a government pledge to spend billions in taxpayers’ money to shore up battered banks. The British Treasury said the initial steps could involve $64 billion. In effect, the moves mean the partial nationalization of some banks.

“The action we are taking is unprecedented but essential for all of us,” Prime Minister Gordon Brown told a news conference in London. He said Britain would hold its share in the three banks “at arm’s length” and intended to shed its stake in them in an orderly manner “over time.” Brown said that the announcement Monday had been designed to “build the trust and confidence we need” and that he expected other European countries to use the British model.

In anticipation of the announcements Monday, Asian markets seemed to have steadied and registered significant gains, compared with the sharp declines of last week as chaos battered global stocks. European markets opened higher, while stock futures in the United States – which are bets on the direction of the market before its opening – rose.

Governments in Asia took separate measures to shore up confidence. Indonesia increased a government guarantee on bank deposits, while India promised more for the money market and cut cash reserve requirements. South Korea issued further assurances that it held enough currency reserves.

At the news conference in London, Brown, flanked by Alistair Darling, the chancellor of the Exchequer, again blamed “irresponsible” lending by some bankers for the crisis and said the British government would be “the rock of stability” for “savers, for small businesses and for homeowners.”

Darling said the British measures did not mean that government ministers would take “day-to-day decisions” in the management of financial institutions. “We don’t want to be in the business of running banks.”

The Royal Bank of Scotland – once viewed as among the most solid of Britain’s Main Street institutions – announced it would seek about $34 billion to increase its capital as part of a bailout devised by Brown and Darling.

The bank said the British government would buy preference shares worth about $8.5 billion and underwrite the rest. The deal could give the British government ownership of almost 60 percent of Royal Bank of Scotland, along with more than 40 percent of HBOS and Lloyds TSB, which are negotiating a merger. Barclays Bank said it would raise more than $10 billion from private investors.

As part of the deal, Sir Fred Goodwin, the chief executive of the Royal Bank of Scotland, resigned, reflecting the government’s desire to avoid giving the impression that the bailout was rewarding bankers. He is to be replaced by Stephen Hester, the chief executive of British Land.

Announcing limits on bonuses and dividends at the banks in which the government will have a stake, Brown said: “The guiding idea is fair rewards for hard work, effort and enterprise, not incentives for irresponsibility or excessive risk-taking for which the rest of us have paid.”

The scale of the government moves took some by surprise.

“The capital raising is of a much larger scale than anticipated,” said Simon Willis, an analyst at NCB Stockbrokers in London. “The good news is that it may put U.K. banks on a stronger footing now and give them a cushion to cope with the downturn.”

At the news conference, Brown said he expected other European countries to follow suit in coming days.

Continental European countries had also pledged to inject capital into ailing banks and guarantee some forms of bank debt, a step analysts said was critical to restoring lending between banks and easing a crisis of confidence. The European announcement was expected by midafternoon. The German rescue plan alone could be worth as much as $536 billion.

The European action throws the spotlight back on the United States, where officials said Treasury Secretary Henry Paulson Jr. was studying the feasibility of backing up loans between banks. Lending between banks is considered crucial to the smooth operation of the financial system and the broader economy, but it has slowed considerably because banks are concerned about being repaid, should other banks in such deals run into financial trouble.

The U.S. government was also helping an American financial giant, Morgan Stanley, in its effort to salvage a $9 billion investment by a Japanese bank, Mitsubishi UFJ Financial.

The initial reaction of investors was positive, but the early signs, after one of the worst weeks ever for stock markets, were not a definitive shift in sentiment. Rather, they were seen as a potential hope that the markets might at least stop their free fall.

“It’s going to take actions more than words at this time, given the extreme distress that the money markets are in and the extreme distress that the equity markets were in,” said Douglas Peta, a market strategist at J.W. Seligman. He predicted further drops in the stock and bond markets; the Dow Jones industrial average fell 18 percent last week.

But there were some significant steps. In Paris, European leaders agreed Sunday to a unified plan that would inject billions of euros into their banks and guarantee bank debt for as long as five years. President Nicolas Sarkozy of France, who led the talks in the Elysee Palace, said governments would announce concrete rescue plans tailored to their national circumstances simultaneously on Monday.

“We need concrete measures,” Sarkozy declared. “We need unity. That’s what we achieved today.”

Leaders of the 15 countries that use the euro did not put price tags on any of their promises, unlike Britain, where Brown announced last week $255 billion in government funds and other measures to stabilize its banks, or the United States, where a $700 billion bailout plan will now be used partly to infuse banks with fresh capital.

The United States is overhauling its rescue package, which originally focused on buying distressed assets from banks. Paulson said Friday that the government would now take equity stakes in banks; the government’s role in the Morgan Stanley negotiations may be an early test of the Treasury’s retooled strategy.

The U.S. government has so far been reluctant to guarantee bank loans to other banks out of concern that it could give banks a competitive advantage over other financial institutions, and thus have unintended consequences.

Europe may have acted more quickly in large part because banks there are facing urgent problems, said Tobias Levkovich, chief equity strategist at Citigroup. Many European financial firms have borrowed more extensively, relative to their capital, than most American banks.

“The Europeans were sitting with a much closer foot to the fire than we were,” he said. “I don’t think they could sit around and wait a week or two.”

Still, the actions taken by European leaders could aid the United States in an indirect way by helping to lower a critical interest rate, said Douglas Dachille, the chief executive of First Principles Capital Management, an investment firm that specializes in bonds.

A daily poll of mostly European banks sets the London interbank offered rate, or Libor, which is used as a benchmark to set borrowing costs for corporate and consumer loans. In recent weeks, the Libor has shot up as banks have become increasingly unwilling to lend to each other.

Banks and investors have severely restricted lending to each other because their capacity to do so has been limited by losses that they have suffered and because they fear they may not be paid back.

For Europeans, the agreement represented a sharp reversal from two weeks ago, when Germany and other countries played down the need for a concerted response to what some characterized as an American problem.

“We are committed in all European states to recapitalize banks if we establish a threat to solvency and a risk to the economy,” the Belgian finance minister, Didier Reynders, said after the leaders met. “The goal is to kick-start the interbank lending market.”

Officials said action would be taken at the national level, within the framework of a “toolbox.” The idea, they said, is that governments face different challenges and need to act quickly in the face of a crisis and that a common front will avoid the danger that one country may undercut another.

“Our goal is to have coordinated action for the euro zone,” said Angela Merkel, the German chancellor, and the meeting “is a very important signal for the strength of the euro zone.”

Officials said France and Germany intended to announce national plans on Monday worth hundreds of billions of euros.

Earlier Sunday, the authorities in Australia and New Zealand announced a blanket guarantee of bank deposits.

While the government initiatives agreed to over the weekend are aimed at reassuring the financial markets, some economists fear that the patchwork nature of some of the measures could fuel further instability by tempting investors to move capital around to take advantage of those countries perceived as the safest havens.

“If you build a nice, comfortable ark for the banks, the question is, ‘Who doesn’t get a seat?’” said Simon Johnson, a former chief economist of the International Monetary Fund. “The answer is the emerging markets.”

Originally published by The New York Times Media Group.

(c) 2008 International Herald Tribune. Provided by ProQuest LLC. All rights Reserved.