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World market rout widens

Fear and foreboding took hold on Wall Street Thursday as the stock market again plunged and investors became convinced that the nation is on the verge of a deep and prolonged recession.

The government took steps toward an extraordinary public investment in U.S. banks and General Motors stock fell to its lowest price since 1950 on fears that it will not be able to weather the downturn.

Share prices fell across every industry and for each of the 30 stocks in the Dow Jones industrial average, which was down 679 points, or 7.3 percent.

The rout continued in Asian markets, where stocks plummeted in early trading today.

The United States and Britain appear to be converging on a similar blueprint for the financial chaos sweeping the world, one day before a crucial meeting of financial leaders begins in Washington that the White House hopes will result in a more unified response.

The British and U.S. plans, though far from identical, have two common elements: injection of government money into banks in return for ownership stakes and guarantees of repayment for various types of interbank loans.

Both remedies will be center stage on Saturday, when President Bush meets with finance ministers from the world's richest countries at an unusual White House meeting to swap ideas.

With credit markets still frozen and stock markets around the world in a deep swoon, there is a growing consensus that the crisis is now so fast-moving and harmful to the global economy that it demands an unprecedented degree of worldwide coordination.

Prime Minister Gordon Brown of Britain made the case, in a letter to President Nicolas Sarkozy of France, for another option gaining favor among economists — guaranteeing short- and medium-term loans between banks — to jump-start the banks' lending.

Need cash, now

The White House confirmed that the Treasury Department was considering taking ownership positions in banks as part of its $700-billion rescue package. But officials said the idea was less developed than the plan to buy distressed assets from banks through "reverse auctions."

The goal, Treasury officials said, is a plan that would be broadly available to all banks, rather than through specific rescue packages negotiated case-by-case. Direct injections of cash would be for comparatively healthy banks. If a bank is failing and needs to be rescued or shut down, the Federal Deposit Insurance Corp. would handle it through its own procedures.

The Treasury proposal to recapitalize banks stems from the realization that as the stock market keeps tumbling, and as mortgage-related securities on banks' balance sheets also plummet, it has become harder for banks to raise fresh capital from investors.

The government concluded it would be able to deliver capital faster and with greater assurance if it did so directly.

The switch may also reflect growing doubts about the Treasury's plan to purchase mortgage-related assets. Through reverse auctions, aspiring sellers of the hard-to-sell securities would compete to offer the securities to the government. The auctions are supposed to jump-start the market for these securities and allow investors to value them on balance sheets. Once banks' balance sheets are cleansed of toxic assets, the theory goes, they would be able to tap fresh capital.

But the concept is untested, experts said, and the deteriorating market conditions had further dimmed its prospects.

It is far from clear that other countries will accept the need for wholesale recapitalization of the banks. Even if they did, neither the British nor the American plan would necessarily be a template.

"You have lots of people skinning the cat in lots of different ways," said McCormick, the Treasury's point person in organizing the meetings of finance ministers. "It's clear that one size does not fit all."

A perplexing dive

The plummeting stock market could not be blamed on any single piece of horrible news — there were no additional bank failures or government bailouts or corporate bankruptcies.

"I've never seen a panic like this," said David Wyss, chief economist at Standard & Poor's. "I've seen stock market drops, but not an overall panic."

In the busiest day in New York Stock Exchange history, panicky investors dumped stocks en masse. The plunge came in a stomach-churning 90 minutes.

The Dow was down just 140 points at 2:30 p.m., and 200 points at 3. But then, wave after wave of selling began to roll through the market. By 3:20, the index was down 380 points. Ten minutes later, it was down 390 points. By 3:45, it was down 660. After staging a brief rally, it fell again.

Fear from Wall Street flooded into Asia today, where markets were dramatically lower in early trading. Japan's benchmark Nikkei average plunged nearly 10 percent, Australia markets slid more than 7 percent and South Korea stocks were down about 8 percent.

"There is distrust in the market and distrust in the government that is trying to heal this," said Peter Cardillo, chief market economist with New York-based Avalon Partners.

>>fast facts

Depths of misery

• In the last six trading days the Dow has plummeted 2,251.8 points, or 20.8 percent, a decline big enough, on its own, to mark the start of a bear market. It also is similar to the drop in the Dow on Black Monday, Oct. 19, 1987, when it fell 22.6 percent.

• The broad Standard & Poor's 500 fell 7.6 percent, the seventh consecutive day of misery on Wall Street. The index has now fallen 42 percent from its all-time high one year ago Thursday and 22 percent this month alone.

• Stocks are on track for their worst calendar year since 1937.

• Investors pulled a record $72-billion out of stock and bond mutual funds in September, the research firm TrimTabs said Thursday, and in the past week alone took out $52-billion.

World market rout widens 10/09/08 [Last modified: Sunday, October 12, 2008 6:30pm]

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