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World Banks Add Liquidity to Markets, Speculation Grows Over New Mergers

BY Admin  September 18, 2008 at 11:15 AM EDT

Morgan Stanley headquarters in Times Square; AP

As markets opened in Europe and were underway in Asia, the
U.S. Federal Reserve said it authorized the expansion of temporary reciprocal
currency arrangements, known as swap lines, to allow banks to borrow more
dollars in money markets at lower rates. The move is the fourth such concerted
effort since the credit crisis began last year.

The move, announced at 3 a.m. ET, includes $110 billion for
European banks, $60 billion for the Bank of Japan and $10 billion for the Bank
of Canada, the Washington Post reported.

The institutions will then make that money available through
short-term loans to banks and financial firms that have, given the turmoil of
recent days, become hesitant to lend to one another. Short-term loans between
financial houses are crucial for the global financial system. However, due to
the current crisis in the markets, banks have hoarded cash and demanded
interest much higher than normal for that sort of lending.

Paul Mortimer-Lee, head of market economics in the London
office at BNP Paribas, said the move reflected concerns that the financial
markets now appear to be facing their gravest problems since the Great
Depression.

“We’re high on a mountain, with a thin rope and holding
on by our fingertips,” he told the New York Times. “Are policymakers
scared? They should be.”

American stock indexes opened Thursday morning with strong
gains, with the Dow Jones industrials rising more than 100 points in the first
few minutes of trading.

Lloyds TSB’s takeover of U.K. lender HBOS also dispelled
some of the gloom hanging over global markets, the BBC reported. But markets
are expected to stay volatile on fears that more firms could succumb to the
financial crisis.

Meanwhile, Wall Street’s second-largest investment bank,
Morgan Stanley, is apparently the latest major financial firm looking for a
buyer. The bank is discussing a deal with U.S. regional banking powerhouse
Wachovia Corp. while it is also being eyed by HSBC Holdings and China’s CITIC
Group, CNBC reported.

Morgan Stanley and its larger rival Goldman Sachs Group
Inc., the largest surviving independent Wall Street investment bank, are both facing
concerns that the credit crunch could constrict the short-term funding they’ve
traditionally relied on.

“Morgan Stanley is in merger talks with Wachovia, a
move that would make more sense if Morgan were seeking synergies rather than
seeking safety,” Christopher Low, chief economist at FTN Financial in New
York, said in a research note, according to Reuters. “Wachovia, after all,
has huge option ARM exposure through Golden West, and option ARMS are shaping
up as this year’s subprimes.”

Washington Mutual, another massive bank beleaguered by
mortgage losses, put itself up for sale, the Times reported late Wednesday.
Potential suitors include Citigroup, JPMorgan, Wells Fargo and HSBC. WaMu’s
shares jumped 19 percent in early trading.

President Bush addressed the market and other economic
developments Thursday morning, speaking from just outside the Oval Office.

While acknowledging that the financial markets continue to
deal with “serious challenges” the president promised that “the
American people can be sure we will continue to act to strengthen and stabilize
our financial markets and improve investor confidence.”

“These actions are necessary, and they’re important.
And the markets are adjusting to them,” the president said.

Mr. Bush decided to cancel travel plans and stay in
Washington Thursday to address the economic concerns. The president had planned
to attend a GOP fundraiser in Jupiter, Fla., and tour a waste facility in
Huntsville, Ala. He also was to have attended another fundraiser in Huntsville,
an event that will now be attended by Vice President Dick Cheney.

In other economic news, the number of U.S. workers filing
new claims for jobless benefits rose unexpectedly by 10,000 last week, as the
first wave of job losses from Hurricane Gustav rolled in after reporting delays
in Louisiana, the Labor Department reported Thursday. Initial claims for state
unemployment insurance benefits rose to a seasonally adjusted 455,000 during
the week ended Sept. 13 from 445,000 the prior week. Analysts polled by Reuters
had forecast claims to drop to 440,000 last week.