Bank Stocks Surge as Government Pumps in $250 Billion

NEW YORK (Reuters)- Bank stocks soared on Tuesday after the government set plans toinject $250 billion into the battered sector, where exposure to toxicmortgages and other debt has pummeled investor confidence and shareprices.

Nine major lenders agreed to accept the preferred stock investments,which are limited to $25 billion per lender. The injections come asregulators worldwide scramble to unfreeze a financial system paralyzedby worries over capital, liquidity and the potential for a globaleconomic recession.

"This clearly adds an immense backstop against the prospect of thelargest of the financials falling into capital inadequacy," saidGregory Miller, chief economist at SunTrust Banks Inc in Atlanta. "Thekindest of us would suggest that it’s a necessary evil."

The 24-member KBW Bank Index .BKX rose as much as 13.6 percent andwas up 9.7 percent in early afternoon trading. Credit spreads onlenders’ debt also tightened, suggesting that investors perceive lessrisk of default.

Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz), Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz), Wells Fargo & Co (WFC.N: Quote, Profile, Research, Stock Buzz), Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz), Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and Bank of New York Mellon Corp (BK.N: Quote, Profile, Research, Stock Buzz) are among the nine lenders to receive injections, people familiar with the plan said.

Merrill Lynch & Co (MER.N: Quote, Profile, Research, Stock Buzz), which Bank of America is buying, and State Street Corp (STT.N: Quote, Profile, Research, Stock Buzz) are also included, according to media reports.

"In recent weeks, the American people have felt the effects of afrozen financial system," U.S. Treasury Secretary Henry Paulson said ata news conference. "Today’s actions are not what we ever wanted to do,but today’s actions are what we must do to restore confidence to ourfinancial system."

Funds will come from the $700 billion taxpayer-funded bailoutpackage that President George W. Bush signed into law earlier thismonth.

UNCLOGGING THE SYSTEM

"Hopefully, this strong approach is the dynamite needed to blastthrough the clogged-up financial system," said Sen. Chuck Schumer, aNew York Democrat.

New York is home to six of the nine initial recipients of the capital injections.

Separately, the Federal Reserve set plans to begin buying large amounts of short-term debt starting on October 27.

The Federal Deposit Insurance Corp, meanwhile, said it willguarantee through June 30, 2012, new senior unsecured debt issued on orbefore June 30, 2009, and also back non-interest bearing depositaccounts that businesses typically use.

Regulators in Europe have pledged more than 1 trillion euros ($1.37trillion) in direct capital injections for banks on that continent, andto help underwrite lending.

"We will be looking today to an absolute sea change in the globalfinancial system in terms of liquidity," Stephen Schwarzman, chiefexecutive of the private equity firm Blackstone Group LP (BX.N: Quote, Profile, Research, Stock Buzz), said at a Dubai investor conference.

Moody’s Investors Service analysts Gregory Bauer and Robert Youngsaid the $250 billion is equal to about one-fourth of all equitycapital of the U.S. banking system. "This is a massive amount of freshcapital that now is reliably available to restore the health of thefirms’ balance sheets," they wrote.

Citigroup analysts, meanwhile, raised ratings for 14 U.S. banks to "buy" from either "hold" or "sell."

DAMAGE ALREADY DONE

But the capital injections do not free banks from problems tied tomortgages, consumer and business credit, and illiquid debt expected topersist well into 2009 or longer. Through Monday, the KBW index wasdown 37.3 percent this year.

"There’s been damage done," said Jim Awad, chairman of W.P. Stewart& Co in New York. "We’ll see that when companies give theirthird-quarter results and provide fourth-quarter outlooks."

Analysts expect JPMorgan and Wells Fargo to report lowerthird-quarter results on Wednesday. Most major U.S. lenders arescheduled to report quarterly results by the end of next week.

In afternoon trading, Bank of America shares rose 15.7 percent to$26.37; Citigroup rose 16.9 percent to $18.41; JPMorgan fell 1.7percent to $41.26; Wells Fargo rose 9 percent to $33.14; Goldman Sachsrose 12 percent to $124.32; Morgan Stanley rose 20.4 percent to $21.79;Bank of New York Mellon rose 6.1 percent to $32.56; Merrill Lynch rose18.1 percent to $20.81; and State Street rose 16.4 percent to $56.28.

(Additional reporting by Lynn Adler, Leah Schnurr, Walden Siew,Daniel Trotta and Ryan Vlastelica in New York; Mark Felsenthal, DavidLawder, Jeremy Pelofsky and Tabassum Zakaria in Washington; and MeganDavies in Dubai; editing by John Wallace)