Governments to buy bank stakes; stocks soar

By Eddie Evans

NEW YORK (Reuters) - Governments around the world bet hundreds of billions of dollars to rescue failing banks on Monday, sending world stocks soaring and giving Wall Street its biggest one-day gain ever.

The U.S. government is set to buy $250 billion in equity stakes in banks, a source briefed on the situation said, after Britain, Germany, France and other European countries pledged more than 1 trillion euros ($1.36 trillion) for bank guarantees and equity stakes.

U.S. regulators would announce details of the U.S. plan at 8:30 a.m. on Tuesday, the Treasury Department said.

The Dow Jones industrial average and the S&P 500 index raced to an 11 percent gain, their biggest ever, after recording their worst week in history last week amid panic over collapsing banks and fears that major economies were headed toward recession.

Stocks worldwide added more than $1.7 trillion in value on Monday, based on a record 9.3 percent gain in the MSCI world equity index.

"Sometime last week it seemed like we faced Armageddon, so to have a coordinated plan on stabilizing banks is huge progress," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Treasury Secretary Henry Paulson met with top Wall Street bankers on Monday, agreeing to spend $250 billion on equity stakes and a three-year guarantee of bank-to-bank lending, the source said.

This was an about-face from a previous U.S. focus on buying bad debt from banks, after world finance ministers coalesced around a British proposal at weekend meetings in Washington.

Wall Street on Monday also focused on investment bank Morgan Stanley, which reached a financing deal with Mitsubishi UFJ Financial Group Inc (MUFG), possibly with U.S. government support. Morgan shares soared 87 percent, after losing 58 percent last week.

And Banco Santander said it would acquire the remaining 75 percent stake in Sovereign Bancorp Inc it does not already own, as the euro zone's biggest bank hunted for bargains in the beaten-down financial sector.

In addition to the bank bailouts, the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank said they would lend commercial banks as much U.S. dollar liquidity they needed.

That had an instant impact on bank-to-bank lending rates, which eased, but there was still no clear evidence of funds cascading from banks to companies.

U.S. bond markets were closed for the Columbus Day holiday.

The euro and sterling gained strength on the European plans.

Oil rose more than $4 to $82 a barrel.