Rich Nations Pushing for Coordination in Rescue


Richard Moore

Rounding up the fire brigade after the house has burned down.

October 11, 2008

Rich Nations Pushing for Coordination in Rescue


WASHINGTON — The United States and six other nations that are among the world’s richest agreed on Friday to a coordinated plan to rescue the financial industry, but fell short of offering concrete steps to backstop bank lending on a day when fear tightened its grip on investors from Wall Street to Hong Kong.

Treasury Secretary Henry M. Paulson Jr. said the United States would move aggressively on one part of the plan by infusing American banks directly with cash and taking ownership stakes in return.

In the five-point plan, issued after finance ministers met at the Treasury Department, the Group of 7 countries broadly endorsed the idea of taking ownership positions in banks — a strategy first adopted by Britain and now emerging as a major part of the rescue effort in the United States.

But the nations were vague on how or when that will happen, and did not endorse a proposal by Britain to provide coordinated guarantees of lending between banks, as a way to shake loose credit markets.

The attempt at coordination came at the end of one of the worst weeks in the history of Wall Street. The Dow Jones industrial average plunged 18 percent for the week, and wildly swung more than 1,000 points on Friday alone before settling down 128 points, or 1.5 percent.

Many investors had hoped the meeting of the finance ministers from the world’s leading economies would result in more concrete steps to restore the paralyzed credit markets, and lay out a blueprint for recapitalizing banks.

“This fell short,” said Adam Posen, the deputy director of the Peterson Institute for International Economics. “It all seems to be moving toward direct injection of capital, but why aren’t they just saying it?”

Mr. Paulson said the seven countries — the United States, Britain, Germany, France, Italy, Canada and Japan — had committed themselves to five principles, ranging from preventing the failure of important banks to protecting the bank deposits of savers.

“People came together,” Mr. Paulson said at a news conference, noting that the diplomatic language of such communiqués had been replaced by a plan “that’s different, that’s to the point, that’s powerful.”

Treasury officials said the United States may embark on direct injections of capital into banks within the next two weeks, even earlier than the government plans to begin buying distressed assets from banks under the bailout plan that President Bush signed just over a week ago.

Mr. Paulson said hopes for a grand global solution were naïve, given the differences among countries. Indeed, other finance ministers had tried to reduce expectations for the meeting.

“Don’t imagine that we’ll have a harmonized response that will be the same for everybody because you can’t apply the same method to different market situations,” the French finance minister, Christine Lagarde, said earlier in the day.

The Group of 7 session was one of a flurry of meetings in conference rooms from the Federal Reserve to the International Monetary Fund at which officials discussed potential remedies for the financial system. The timing was fortuitous: the world’s financial elite had gathered in Washington for the annual meetings of the monetary fund and the World Bank.

But the pageantry and parties that normally characterize this gathering have been replaced by an atmosphere of high drama and deep gravity — a 21st century echo of Bretton Woods, the 1944 conference in New Hampshire at which the Allies fashioned the financial institutions of the postwar era.

The discussions on Friday focused on the growing likelihood that the United States and several major European countries would have to partially nationalize their banking systems.

Germany remains deeply reluctant about such a course, according to people with knowledge of the German position, because of fears that it would end up bailing out the banks of its neighbors.

Such a step would have been unlikely here a week ago, too, but the swiftness of events is forcing officials to throw out decades of conventional wisdom about how free markets should operate.

Events also seem to have upended the Treasury’s plan to stabilize the financial system by buying billions of dollars of troubled assets from the banks — a plan that Mr. Paulson and his Treasury Department colleagues expended enormous energy designing and selling to a skeptical Congress.

“The original Paulson plan didn’t hit the nail on the head,” said Kenneth S. Rogoff, an economist at Harvard and an adviser to the Republican presidential candidate, John McCain. “It’s one thing to go back to Congress six months later and say ‘I didn’t ask for enough.’ It’s another to go back after six days and say ‘I didn’t ask for enough.’ ”

The Treasury has been soliciting feedback about capital injections from Wall Street chief executives, top hedge fund managers, and other big investors, according to a senior banker briefed on the proposal.

One message the industry has given officials is that their plan should help strong banks, rather than save deeply troubled ones. They have suggested tying the eligibility for a government investment to a bank’s so-called Camel rating — a measure used by regulators to grade an institution’s financial strength. Only banks in the highest-rated categories would qualify for support.

Another suggestion is for regulators to effectively halt dividend payments for all banks in which the government injects capital, this banker said. This would help remove the stigma of lowering the dividend, and keep about $55 billion a year from leaking out of the banking system.

The United States and Germany appear to be the pivotal players in determining whether recapitalizing banks becomes a global standard, given that Britain has already adopted such a plan, and France, Italy and Japan generally support it. Japan recapitalized its banks after a financial crisis in the 1990s.

Before the meeting, Italy’s finance minister, Giulio Tremonti, criticized a draft of the communiqué, saying it was too weak, and threatened not to sign it. The final text was very different, he said.

Prime Minister Silvio Berlusconi of Italy raised eyebrows earlier in the day, with a call for countries to shut their financial markets while the authorities drafted new rules for the financial system — a suggestion that was rebuffed by the White House and later disavowed by Mr. Berlusconi himself.

While the leaders managed to paper over any rifts by the time they emerged from their meeting, their lack of agreement on a British-style guarantee of loans made between banks worried economists.

If other countries do not follow the same course as Britain, they said, it could destabilize the financial system, because money may flow to Britain from countries without those same guarantees.

“You now have the full faith and credit of the British government standing behind the banking system,” said Barry Eichengreen, a professor of economics at the University of California, Berkeley. “The British could suck deposits from continental Europe and even the United States.”

Edmund L. Andrews and Carl Hulse contributed reporting from Washington, and Eric Dash from New York.

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