Treasury begins dishing out financial rescue funds

WASHINGTON — The U.S. government will start doling out $125 billion to nine major banks this week to get credit flowing again, but Monday's announcement offered cold comfort to investors as rising anxiety about a worldwide recession drove stocks down sharply around the globe.

Assistant Treasury Secretary David Nason said the deals with the nine banks were signed Sunday, and the government will make the stock purchases this week. The deals are designed to bolster the banks' balance sheets so they will begin more normal lending.

The action will mark the first deployment of resources from the government's $700 billion financial rescue package passed by Congress on Oct. 3.

The bailout package has undergone a major change in emphasis since it was passed by Congress. Treasury Secretary Henry Paulson decided to use $250 billion of the $700 billion to make direct purchases of bank stock, partially nationalizing the country's banking system, as a way to get money into the financial system more quickly.

The plan is also aimed at clearing banks' balance sheets of bad assets. That effort has yet to begin although the administration expects to use $100 billion to purchase bad assets in coming months.

The deployment of the first $125 billion to the major banks had been delayed while the government and the banks worked out the details for the purchases. Nason, a key architect of the rescue plan, said in an interview Monday on CNBC that those agreements had been signed late Sunday night.

Treasury is also starting to give approval to major regional banks with the goal of getting another $125 billion in stock purchases made by the end of this year.

KeyCorp, said Monday it would issue stock for a $2.5 billion infusion of capital from the government. SunTrust Banks Inc. also said it has received preliminary approval from Treasury for a $3.5 billion investment.

Treasury has given the go-ahead for stronger banks to use the money it receives in the rescue program to acquire weaker banks. That has prompted criticism the government should not be financing the consolidation of the banking system — in effect helping to choose winners and losers.

As fears mounted of a prolonged and deep worldwide recession, a seemingly unstoppable juggernaut of selling swept across world markets Monday, stripping billions of dollars of wealth from people across the globe.

Wall Street lost nearly 90 points in the first few minutes of trading.

Major stock markets in Hong Kong, Tokyo, Britain, France and Germany slid, dragging down smaller bourses in emerging markets such as South Korea and the Phillipines. Tokyo's Nikkei 225 index closed at its lowest since October 1982.

The Federal Reserve will begin a two-day meeting Tuesday and many economists expect it to cut interest rates — perhaps to their lowest point in more than four years — with the hope of relieving some of the economic pain felt by many Americans.

The convergence of a housing collapse and a lockup in bank lending has created the worst financial crisis in more than a half-century.

With a recession seen as inevitable in the U.S., if not already under way, any Fed rate cut would be aimed at cushioning the fallout in the world's largest economy.

Vanishing jobs and shrinking paychecks have forced U.S. consumers to cut back sharply. Millions of ordinary Americans have watched their 401(k)s and other nest eggs shrink and the value of their homes drop, making them feel in even worse financial shape. In turn, businesses have cut back on hiring and other investments as customers hunker down and credit problems make it harder and more costly to get financing.

Not even China's mighty economy was immune to the rising recession anxiety. Its benchmark index slumped to its lowest level in more than two years as investors reacted to dismal earnings reports.

Currency markets were unnerved by a statement from seven leading industrial nations Sunday warning of the "recent excessive volatility" in the value of the Japanese currency, which is rising against the U.S. dollar toward the 90 yen level and near 13-year highs.

Dealers had one wary eye on central banks, watching whether they would intervene in currency markets to sell yen and prop up other currencies. The yen's rise threatens Japan's export-heavy economy by making its goods relatively more expensive.

Shares of top Japanese exporters Toyota Motor Corp. and Sony Corp. were hit hard Monday. The losses came despite a report that the government was considering a massive capital injection into struggling banks in a bid to calm jittery financial markets.

Investors fled to the safety of some types of government debt Monday. The price of gold — another traditional safe have in times of panic — rose.

Investors around the world seemed largely unimpressed by government efforts to help lift market sentiment. South Korea's central bank cut its key interest rate Monday by three-quarters of a percentage point, its largest-ever reduction. The country's stock market benchmark Kospi ended with a 0.8 percent gain.

Elsewhere, central banks in Australia and Hong Kong added funds to their markets to boost liquidity.

— —

Associated Press writers Jeannine Aversa in Washington, Tim Paradis in New York and Pan Pylas in London contributed to this report.