America's battered financial services industry is close to getting the lifeline it was desperately seeking as government leaders sketched out a plan late Thursday to rescue banks from bad debts that threatened their survival.
Treasury Secretary Henry Paulson said after a meeting with congressional leaders that there was consensus on a plan to deal with illiquid real estate and other assets on the books of financial institutions.
That could require massive amounts of additional federal funding, but leaders from both parties in Congress said they are prepared to act quickly on legislation needed to save big Wall Street firms and Main Street banks alike from collapse amid the biggest realignment of the financial system since the Great Depression.
Though specific details have not been spelled out, the legislation could spare the weakest banking companies from failure. And it takes some of the immediate pressure off the two remaining major independent investment banks, Goldman Sachs and Morgan Stanley, to reach deals with deposit-taking institutions to ensure a steady flow of funds for their operations.
That was one of the reasons Merrill Lynch hastily agreed to be acquired by Bank of America Corp. earlier this week.
SEC Chairman Christopher Cox, who attended the closed-door meeting at the Capitol with Paulson and Federal Reserve Chairman Ben Bernanke, also had good news for financial companies struggling to fend off investors who sell their stock short _ a bet that they can buy it back later at a cheaper price and make a profit.
Cox told the lawmakers the SEC may order a temporary emergency ban on all short-selling _ not just the aggressive forms it already has targeted, according to a person familiar with the matter.
The ban might apply to stocks of selected financial companies, to all financial companies or even possibly to all public companies. Cox and the other four SEC commissioners were meeting Thursday night to consider the plan, according to the person, who spoke on condition of anonymity because the possible action hasn't been publicly announced.
These latest government moves come too late for Bear Stearns, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., the three Wall Street pillars that have lost independence or been toppled since the credit crisis began a year ago.
``This staves off judgment day,'' said Anthony Sabino, professor of law and business at St. John's University. ``This is a detox for banks, and will help cleanse themselves of the bad mortgage securities, loans and everything else that has hurt them.''
Investors took comfort from the potential for some kind of government intervention. Shares of Goldman Sachs Group Inc. and Morgan Stanley shot up more than 10 percent in after-hours trading late Thursday.
Until a late reversal in the trading day Thursday, the dramatic slide in the shares of those two investment banks led many to think they had to act quickly to tie up with commercial banks or overseas investors with deep pockets.
The reason: Investment banks rely heavily on short-term borrowing to finance their proprietary trading and lending businesses, and the recent credit market disruptions have hammered home the point that they need to find more stable sources of funds to ride out market volatility.
``People are finally realizing that we are probably in the worst financial crisis since the Depression,'' said Alfred E. Goldman, chief market strategist for Wachovia Securities, a 49-year veteran of Wall Street. ``We're in a period of excessive fear.''
Economists including former Federal Reserve Chairman Alan Greenspan and investors like Wilbur Ross had been predicting more banks would fail in a shakeout reminiscent of the Great Depression. After the stock market's crash in 1929, 9,000 institutions failed and $140 billion of deposits were wiped out in the following decade.
The government adopted policies to protect bank depositors since then and government agencies have already closed nearly a dozen insolvent banks while making provisions to reopen them under new ownership in recent months.
Global banks and brokerages have written down more than $350 billion of distressed investments since the crisis began last year, and now bankers are looking to avoid becoming another statistic.
Morgan Stanley, the No. 2 U.S. investment bank, had been in talks with a number of potential suitors and investors to help it survive, according to people familiar with the situation who asked not to be identified by name because the discussions were still ongoing.
John J. Mack, chief executive of the 73-year-old securities firm, on Thursday told the company's 48,000 employees in a town hall meeting that he's doing everything possible to keep the embattled bank afloat. A day earlier, Mack complained in a memo to employees that their bank was ``in the midst of a market controlled by fear and rumors.''
He made a round of telephone calls late Wednesday to strike a deal or raise cash in a bid to calm investors and prevent more damage to Morgan Stanley's free-falling shares, these people said.
Morgan Stanley also opened up talks with China's sovereign wealth fund and state-owned bank Citic Group, and the Singapore Investment Fund about a possible cash infusion, people familiar with the discussions said.
There also were advanced negotiations with executives from retail bank Wachovia Corp., one person said. Other suitors could include big global banks such as Britain's HSBC Holdings PLC and Germany's Deutsche Bank.
Wachovia declined to comment about a potential deal. Spokesmen for GIC and Citic could not immediately be reached for comment.
Meanwhile, Seattle-based Washington Mutual, which has lost billions and seen its shares plummet due to subprime mortgage exposure, hired Goldman Sachs to contact potential bidders _ a list that so far includes Wells Fargo & Co., JP Morgan Chase & Co. and HSBC.
And in London, Britain's Lloyds TSB Lloyds TSB announced a $21.85-billion deal to take over struggling HBOS PLC, Britain's biggest mortgage lender.
``This isn't just a U.S. problem, it is a global problem,'' Stu Schweitzer, JPMorgan Chase & Co.'s global markets strategist told the bank's institutional clients on a conference call this week. ``The economy has its problems, the financial system has its problems, we can believe in Armageddon or believe that in the end, step by step and trial and error, the authorities will get it right.''
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