A United States government promise to rescue Wall Street from its debt crisis and global central bank intervention spurred a mass market rally on Friday, though questions remained about big-name banks.
Stocks rose around the world, the dollar strengthened while safe haven investment gold fell after US Treasury chiefs vowed to quickly announce a plan to soak up the debt that has brought the fall of Lehman Brothers and badly hit other banks.
Wall Street icon Morgan Stanley looked set to become the latest victim though, with the Financial Times saying a forced marriage with China Investment Corporation (CIC) was likely.
After central banks around the world put hundreds of billions of dollars into markets, US Treasury Secretary Henry Paulson made a new confidence-boosting move, seen as an attempt to launch a lifeboat for untold billions of toxic debt.
Paulson, speaking after he and US Federal reserve chairperson Ben Bernanke met Congressional leaders, said: “We’re coming together to work for an expeditious solution.”
Officials are working to tackle “the heart of this problem, which is illiquid assets on financial institutions in the United States on their balance sheets”, he said.
“What we are working on now is an approach to deal with the systemic risk and the stresses in our capital markets,” he said.
Central banks kept pumping tens of billions of dollars into the system on Friday and shares surged, with London stocks up 6,04% and Paris and Frankfurt close behind. Japanese stocks gained 3,76% and Shanghai shares 9,5%.
Leading Russian stocks leapt 23% where suspended trading was resumed.
In another bid to support tumbling markets, British and New York state authorities temporarily stopped the practice of short-selling, when traders borrow stock to resell when the price falls.
However, widespread worries remain.
The Financial Times said Morgan Stanley was making “frantic attempts” to find a partner and was discussing selling a stake to CIC, which could end up with 49% percent from 9,9% now.
US media have also widely reported that Morgan Stanley was seeking a white knight, but the Financial Times said the bank preferred to sell a stake to CIC to a merger with US bank Wachovia Corporation.
An unnamed CIC executive was quoted as saying in Beijing that taking a holding “could be very hard now as the purchase of a stake … could be subject to the US government foreign investment review”.
The latest vicious chapter of the 14-month-old US subprime home-loan crisis began at the weekend with the collapse of US investment banking giant Lehman Brothers.
That was followed by the $85-billion nationalisation of insurance titan AIG, a wave of other distress signals, the rescue of British bank HBOS on Thursday, and reports that the biggest Swiss bank, UBS, might seek help through a merger with Credit Suisse.
The crisis has also savaged other big Wall Street names such as Bear Stearns and Merrill Lynch.
The European Central Bank injected another $40-billion on Friday and the Japanese bank the equivalent of $28,3-billion, taking official support so far this week into the realms of $700-billion.
Media reports said Paulson was considering a bail-out for bad debt carried by US financial corporations by taxpayers along the lines of a debt-carrying entity used to end the savings and loans crisis in the 1980 and 1990s.
Then, the US government created the Resolution Trust Corporation, which bought up assets from failed banks and eventually re-sold them.
“Such a plan would potentially provide a long-term solution to the credit crisis,” said John Kyriakopoulos, a strategist at National Australia Bank Capital.
But Kyriakopoulos said the government and central bank actions so far “merely stopped the bank funding crisis from getting even worse, rather than reversed it”. — AFP