U.S. Plan to Invest in Banks Fails to Convince Investors, Yet

The Treasury, Federal Reserve, and the FDIC announced October 14 a major shift in the government’s response to the financial crisis, saying it would invest up to $250 billion in nine major U.S. banks in exchange for selling preferred shares to the government, would temporarily guarantee the senior debt of all “FDIC-insured institutions and certain holding companies, as well as deposits in non-interest bearing deposit transactions accounts,” and would, beginning October 27 through the Fed’s Commercial Paper Funding Facility, fund purchases of corporate CP of three-month maturities from “high-quality issuers.”

While stock markets around the world posted, in some instances, their biggest gains in history on Monday, October 13, in response to the anticipated U.S. move and the actual steps detailed by various European governments that day, markets dipped on October 14, though there were signs that the liquidity squeeze was loosening. Early trading October 15 saw stocks lower on reduced profits at companies like JP Morgan Chase and Charles Schwab & Co., and the Commerce Dept.’s report that retail sales in September were off 1.2%.