The U.S. government agreed to inject $20 billion of new capital into one of the world's biggest banks, Citigroup Inc, to avoid a collapse that could have wrought financial havoc around the globe.
Washington, also under pressure to rescue an ailing motor industry, effectively guaranteed most of Citigroup's potential $306 billion losses in high-risk assets. It was the biggest bank bailout yet and a measure of the crisis sweeping the world.
The Gulf emirate of Dubai, home to a new luxury mega-resort built on a manmade palm-shaped island visible from space, announced it was pulling back on a building spree symbolic of extravagant boom years leading up to the current crisis.
The United Arab Emirates began to bail out Dubai's lenders and consolidate its financial sector.
The Citigroup intervention had been widely expected in some form, but Asian equity markets trimmed losses, while European stocks rose some 4 percent on news the U.S. Treasury would not allow the number two U.S. bank to fail in the way of rival Lehman Brothers.
U.S. stock index futures pointed to a higher open on Wall Street. S&P 500 futures were up one percent.
"The move will help the markets not implode today," said Rory Robertson, interest rate strategist at Macquarie in Sydney.
"It's all good stuff but the fact that the Fed has to bail out one of the biggest banks in the world is not exactly a vote of confidence."
Citigroup has the farthest international reach of any U.S. bank, with operations in more than 100 countries. The bank was widely perceived to be too big to be allowed to fail.
The plan calls for Citigroup, America's second-biggest bank, to issue $27 billion in preferred shares to the U.S. Treasury and the Federal Deposit Insurance Corp.
The Fed, Treasury and FDIC in return will shoulder most of the potential losses on Citigroup's $306 billion portfolio of debt assets, beyond an initial $29 billion in losses which Citigroup would be responsible for.
"The U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the Federal Reserve, the Treasury Department and FDIC said in a joint statement.
WIDESPREAD RESPONSE
Citigroup, which saw its shares slump 60 percent last week, was not the only bank having to raise more funds.
Asian-focused UK bank Standard Chartered said it planned a $2.7 billion rights issue to boost its capital reserves, while other banks were also expected to raise money.
The global financial crisis has torn through the Arab Peninsula, until recently thought immune due to massive sovereign savings and earnings from energy exports, with almost the same violence as in Europe and North America.
In a major policy shift, the United Arab Emirates federal government will inject capital into its Emirates Development Bank, a newly created rescue vehicle preparing to absorb merging Islamic lenders Amlak and Tamweel, a leading official said.
A cash injection would represent the first big step by the federal government, dominated by the conservative oil-exporting emirate of Abu Dhabi, to bail out high-flying banks in neighboring Dubai, suffering under the global crisis.
Members of the 21 nation Asia-Pacific Economic Cooperation (APEC) forum pledged to take quick and decisive action to help the global economy.
But a deputy governor at China's central bank said interest rates were at a "relatively appropriate" level, dampening speculation of a more immediate monetary stimulus.
Aides said U.S. President-elect Barack Obama was considering delaying a campaign promise to rescind tax cuts on high-income Americans, while the British government was set to announce a stimulus package including temporary tax cuts.
Obama, who takes over from President George W. Bush on January 20, is ready to announce his top economic team on Monday, holding a news conference at 11 a.m. in Chicago (12 p.m. EST).
He plans to nominate Timothy Geithner, president of the New York Federal Reserve Bank, as Treasury secretary, a transition official said. Lawrence Summers, 53, Treasury secretary in the Clinton administration, will help shape policy as director of the White House National Economic Council.
The potential size of the latest U.S. stimulus plan appears to be growing from the $100 billion to $300 billion previously suggested by congressional leaders. One influential Democrat, Sen. Charles Schumer of New York, said on Sunday a package of up to $700 billion was needed to support the American economy.
UK STIMULUS PACKAGE
In Britain, Prime Minister Gordon Brown and his finance minister, Alistair Darling, are expected to announce a package totaling up to 20 billion pounds ($30 billion), by cutting sales tax and offering help for businesses, low earners and struggling home owners.
"I don't see this as a gamble. I see this as necessary, responsible action," Brown told the BBC.
The British economy will shrink by 1.5 percent next year, and for a total six quarters in a row, according to a forecast from the National Institute of Social and Economic Research.
Financial firms around the world are still having to find additional capital to shore up their shaky balance sheets.
In addition to Standard Chartered, UBS, Anglo-Irish Bank and Nomura Holdings (8604.T) were also seeking or likely to need more funds, according to media reports over the weekend.
Swiss bank UBS is likely to need more funds from the state after the company's shares fell almost 50 percent this month, a top Swiss bank regulator told SonntagsZeitung newspaper on Sunday.
