Stocks Gyrate As G-7 Convenes

Stocks took a wild ride before ending mostly lower Friday, capping a historic week, with the U.S. government saying it will go ahead with a plan to buy shares in ailing financial institutions.

Late in the day, Treasury Secretary Henry Paulson said the Bush administration will directly inject cash into banks in exchange for nonvoting shares. That will provide a quick capital boost to banks, rather than the longer, more complex plan to buy distressed mortgage debt at above-market prices.

ADVERTISEMENT
The U.K. announced a similar plan Wednesday. Germany also may do so, Reuters reported.

"We've turned directly to capital injections, which I think has a good chance of working but I don't think it will reverse everything right away," said Dan North, chief U.S. economist at Euler Hermes, an accounts receivable insurer. "Even if everything went back up today, we'd still be in a recession."

Earlier, the Dow dived nearly 700 points after the open, rallied all the way back and reversed again to near its lows, rebounding a second time before fading for a 1.5% loss.

The S&P 500 swung between a 7.7% loss to a 2.9% gain, ending 1.2% lower.

The Nasdaq actually rose 0.3%.

Credit default swaps for bankrupt Lehman Bros. priced at 8.625 cents. Banks and others that sold insurance on some $270 billion in Lehman debt will likely have to pay bondholders 91 cents on the dollar.

But it does provide clarity. Also, an industry group said late in the session that Lehman's debt shouldn't spur any firms to fail.

Still, the S&P 500 tumbled a record 18.2% for the week.

After such massive losses, investors may not have wanted to be short equities over the weekend as major nations mull responses.

G-7 Nations Meet

Finance ministers and central bankers from the Group of Seven nations pledged in a joint statement to "take decisive action and use all available tools."

There were no concrete plans, but meetings were set to continue through the weekend.

Britain called for backstopping loans between banks to try to ease yields at the base of the credit market. The 3-month dollar Libor rate rose seven ticks to 4.82% Friday.

The TED spread, another measure of credit stress, hit a record 4.64%. It was 1.04% on Sept. 1.

But Germany and France said each nation should pursue its own solutions.

Analysts worry that credit turmoil could intensify and further damage the global economy if the G-7 fails to act. The G-20 group of industrializing nations, the International Monetary Fund and the World Bank were also set to meet over the weekend.

"This is obviously a global problem and it needs a global response," said former Federal Reserve Gov. Lyle Gramley. "They've just got to get a hold of this problem. It's by far the most pressing problem they've faced in modern history."

Japan's Nikkei index on Friday dived 9.6% -- the worst since 1987 -- after midsize insurer Yamato Life became the first Japanese financial to collapse amid the credit crisis.

European bourses also tanked.

Trading was suspended in Austria, Russia, Indonesia, Romania, Iceland and Ukraine.

Morgan Stanley (NYSE:MS - News) dived 22% -- 46% intraday -- after Moody's said it may downgrade the financial giant on fears it may not survive even if Mitsubishi UFJ injects $9 billion as planned. Japan's banking giant said the deal will close on Tuesday.

Moody's also put Goldman Sachs on credit watch, seeing tough times through 2009. Goldman fell 12%.

The credit crunch is starting to take a heavier toll on the economy.

Viacom (NYSE:VIA - News) shares fell 17% on Friday and CBS (NYSE:CBS - News) 20% after the media giants warned, blaming the weak economy.

GM rose 3% after saying it wasn't mulling bankruptcy. Shares crashed 31% to a 58-year low Thursday on liquidity fears and plunging auto sales.

Department store Macy's (NYSE:M - News) fell 13% after slashing its 2008 profit target.

Commodities such as gold, corn and copper sold off on global economic fears. Crude dived $8.63 to a 13-month low of $77.99 a barrel. source