Fed Pumps Cash Into System as World Financial Markets Fall

A man strolls past a stock board outside a securities firm in Tokyo, Japan, Monday, Sept. 29, 2008. The benchmark Nikkei 225 index fell 149.55 points, or 1.26 percent, to 11,743.61 after spending the morning in positive territory. (Junji Kurokawa - AP)

Stocks took a steep dive around the world today as troubles in the European financial sector offset news that lawmakers had reached a hard-fought consensus on the $700 billion bailout legislation. The Federal Reserve responded by injecting hundreds of billions of dollars into the U.S. and world financial markets.

The Dow Jones industrial average was down nearly 300 points, or almost 3 percent, at one point, while the Nasdaq was off more than 4 percent and the broader Standard & Poor's 500-stock index had declined more than 3.3 percent. In Europe, markets were off anywhere from 3 to 4.5 percent.

By 10:30 a.m., the Dow was down 260 points.

With world credit markets still sluggish and threatening to drag down the broader economy, the Federal Reserve more than doubled, to $620 billion, the dollars available to nine other central banks -- in Europe, Australia, Canada and Japan -- to make short-term loans to banks and other financial institutions. It also tripled, to $225 billion, the amount available for short-term loans to U.S. financial firms.

The sudden lack of access to short-term credit has raised the risk that what began as a problem in the U.S. mortgage industry will crimp economic activity on a broad scale, with companies unable to borrow the money they need to operate and households unable to fund home, auto and other major purchases.

Noting that short-term interest rates have spiked and remain high, the Fed said it was pumping money into the system "to support financial stability and to maintain a stable flow of credit to the economy during this period of significant strain in global markets."

The new Fed action followed a weekend in which U.S. lawmakers agreed on a financial system bailout plan, while a collection of European governments scrambled to bolster three troubled mortgage companies.

After initial concern that lawmakers would not reach consensus on the bill, investors have become concerned that it will not be enough to address the economy's more fundamental problems and would not stop the crisis from spreading further overseas, analysts said. "People are starting to realize that there is danger in Europe, too," said Doug Roberts, chief investment strategist for New Jersey-based Channel Capital Research.

This weekend, U.K. financial authorities took over mortgage giant Bradford & Bingley, and European governments in Belgium, Luxembourg and the Netherlands pumped $11.2 billion into Fortis, a major Belgian financial services conglomerate.

Asian and European markets were down across the board, with indexes in London, Paris, and Germany all experiencing losses close to or in excess of 3 percent.

The House is scheduled to vote today on the bailout. It would allow the government to purchase the bad debt, including risky mortgages, held by financial firms. But even as Congress finalizes the legislation, consumer spending has stagnated and yet another bank has been pushed into the arms of a competitor.

Also today, Citigroup confirmed it is acquiring the banking operations of Wachovia, which holds billions in risky mortgage debts. The deal was facilitated by the Federal Deposit Insurance Corp. and calls for Citigroup to absorb up to $42 billion of losses and the FDIC to cover any remaining losses. The deal also calls on Citigroup to grant the FDIC $12 billion in preferred stock and warrants.