CENTRAL BANKS and regulators around the world fought back against the turmoil in global markets yesterday, with the US offering $180 billion of liquidity to banks outside the US that are desperate for dollars, as the UK took the drastic step of banning the short-selling of financial stocks.
The US Federal Reserve gave central banks in Japan, the euro zone, the UK, Switzerland and Canada the $180 billion to lend on to local banks that cannot access its onshore dollar lending facilities, temporarily stopping the crisis from lurching further out of control.
Separately, the British Financial Services Authority moved yesterday to ban the short-selling of financial stocks in the UK. The ban will remain in force until January 16th, 2009, when it plans to publish a comprehensive review of short-selling rules.
It follows moves by US authorities to curb short-selling. Short-sellers, who profit when share prices fall, rely on being able to borrow and then sell stock, buying it back later at a lower price and returning the borrowed stock.
Some of the world's biggest institutional investors have stopped lending their shares of Goldman Sachs and Morgan Stanley to help bolster those companies and make life more difficult for short-sellers.
Prime brokers and lenders said several big US, British and other European investors, including Calstrs, Calpers and APG, had suspended all or part of their stock lending, and some of them were pushing for a wider boycott to help shore up confidence in the banks.
However, markets remained under enormous pressure, and the cost of borrowing money for more than a few days went up in spite of the central bank operation.
Many expect further giant liquidity operations in the coming days.
Morgan Stanley, one of two remaining US independent investment banks, last night remained in talks to sell a stake of up to 49 per cent to China Investment Corp, (CIC) the state investment fund, as part of the Wall Street firm's efforts to ensure its survival and reverse a slump in investor confidence. People close to the discussions said the investment bank's top management preferred a stake sale to CIC to a merger with Wachovia, the troubled US lender that approached Morgan Stanley on Wednesday.
They added that talks with CIC, which bought a 9.9 per cent stake in Morgan Stanley in December, were advanced but no deal had been clinched yet.
Morgan Stanley's frantic attempts to find a partner come as its shares have been hammered by concerns over its ability to survive as one of the last two large investment banks. The stock, which has fallen 71 per cent over the past year, was down 30 per cent at $14.79 at lunchtime in New York.
Morgan Stanley executives believe a tie-up with the cash-rich CIC, which was given $200 billion to invest by the Chinese government last year, could help it to restore investors' faith in its business.
US investors remained wary yesterday despite the Fed's support for central banks.
The move appeared to ease investors' nerves initially but a moderate rally on Wall Street yesterday morning was reversed by midday and shares fluctuated in the afternoon.
US president George Bush yesterday sought to reassure Americans that the federal government would take all necessary action to stabilise markets and defended this week's decision to rescue insurance giant AIG with an $85 billion emergency loan.
"These actions are necessary, and they're important. And the markets are adjusting to them. As our recent actions demonstrate, my administration is focused on meeting these challenges.
"The American people can be sure we will continue to act to strengthen and stabilise our financial markets," he said. - ( Additional reporting, Financial Times service)
