Government considers taking stakes in banks

updated 7:15 p.m. ET Oct. 9, 2008

WASHINGTON - Calm gave way to fear in financial markets Thursday, turning a relatively steady day into a rout that pushed the Dow Jones industrials below 9,000 for the first time in five years.

Investors, who had begun the day somewhat optimistic that the government was taking extraordinary steps to contain the financial crisis, turned gloomy under an onslaught of worries about the economy and corporations.

Shares of General Motors Corp., one of the 30 stocks that make up the Dow, tumbled 28 percent to their lowest since 1950. The Dow itself shed almost 7 percent, or more than 600 points, to 8618.69. Broader indexes also fell.

Lending also remained clogged. The London Interbank Offered Rate — a key benchmark for the loans banks make to each other so that they can lend to businesses and people — rose, signaling that banks remain hesitant to make loans for fear they won’t be paid back.

Wall Street had begun the day higher on news that the Bush administration is considering taking part ownership in a number of U.S. banks.

The aim of such a move would be to thaw the lending freeze that threatens to push the world’s economy into recession. It comes after rampant fear about the global economy sent investors scurrying on Tuesday for safety in U.S. government securities despite an orchestrated round of rate cuts by the world’s central banks.

The markets looked set to extend their six day rout another day, though, as they grappled with worries that tight lending would throw the global economy into a recession.

In an effort to show that governments around the world were focusing intently on ways to resolve the crisis, the administration announced that President Bush would meet with finance officials from the Group of Seven major industrial countries at the White House on Saturday.

“The president will have the opportunity to hear directly from the finance ministers about how the financial crisis is affecting their respective economies and the steps they are taking to deal with these challenges both individually and collectively,” presidential press secretary Dana Perino told reporters.

Perino said Bush would stress “the importance of nations working in a coordinated way to address the crisis while respecting the different conditions in each economy.”

Banks face Feb. 1 deadline on compensation The nation's biggest banks face a February deadline for submitting employee compensation plans to the Federal Reserve, according to people with knowledge of the process. Obama: Job losses expected to continue Consumer spending tumbles, incomes flat Economy grows at best pace in 2 years New jobless claims drop slightly

An administration official, who spoke late Tuesday on condition of anonymity because no decision has been made, said the $700 billion rescue package passed by Congress last week allows the Treasury Department to inject fresh capital into financial institutions and get ownership shares in return.

Treasury Secretary Henry Paulson told reporters that Treasury was moving quickly to implement the $700 billion rescue effort and he specifically mentioned reviewing ways to bolster the capital of banks.

“We will use all the tools we’ve been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size,” Paulson said at a Wednesday news conference.

His statements came on the heels of Britain’s move to pour cash into troubled banks in exchange for stakes in them — a partial nationalization.

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