Monday September 29, 6:07 pm ET By Rick Newman
Bailout, Take II: What the Feds Do Next
OK, so that didn't work.
After a bunch of all-nighters in Washington and some premature back-slapping, we're right back where we were a couple of weeks ago, after Lehman Brothers declared bankruptcy and the government lent AIG $85 billion. There's no one-size-fits-all bailout plan, after all. That $700 billion in taxpayer money remains under lock and key. Glum investors are now the ones bailing out, fleeing stocks and bonds and seeking safer ground.
But there are still some levers the government can pull. Working through the mess just won't be as orderly or predictable as it would if there were a single plan and a big pot of money. Here's what's likely to happen next:
Another try at a big bailout plan. A lot of those constituents who have been calling Congress to complain about rescuing fat cats are going to rethink their indignation as they watch the stock markets--and their own portfolios--sink. Lawmakers who voted against the bailout plan are going to have to explain why they're letting the markets collapse. The more uncomfortable voters get, the more likely Congress will be to pass some kind of sweeping relief plan. This is far from over.
More piecemeal bailouts. Before the big $700 billion bailout plan even existed, the Fed and the Treasury Department were already patching leaks in the financial system--one trouble spot at a time. The idea behind an umbrella bailout plan was to overhaul the whole system, establishing public standards and treating every ailing company more or less the same, before a bunch of leaks became a gusher. That would have eliminated the guesswork over whether a struggling company meets the criteria for a rescue--like AIG--or falls short, like Lehman Brothers.
Now we're back to guessing. The feds still have the wherewithal to lend money, buy bad assets, or take other measures to keep ailing companies afloat. What they don't have is a single plan that applies to all companies and the authority to soak up vast amounts of bad assets. So those weekend meetings at the New York Fed, with supplicant CEOs pleading for help, are likely to continue.
More failed companies. Duke University finance Prof. Campbell Harvey predicts there could be 750 to 1,000 bank failures over the next six months because of billions in bad assets stemming from the housing meltdown. Scarce credit also threatens other types of companies that are already struggling and desperately need capital, such as the Detroit automakers and some of the airlines. The government will be able to deal with some of those companies one at a time, but without a comprehensive plan, others will fall through the cracks.
Manic markets. Investors were hoping that a big bailout plan would offer some predictability about how the government will deal with struggling companies. Their crystal ball is once again very dark. That means wild swings in stock prices as big investors try to get out of the market ahead of bad news, and get back in if it looks like the feds will ride to the rescue. One of the most volatile sectors is likely to be regional bank stocks as investors worry that banks like Sovereign Bancorp and National City might be the next to fail.
Patchwork regulation. There's already a system in place for dealing with failed banks--led by the FDIC--but that may not be enough to handle the damage that's unfolding. Even without a big bailout bill, Congress may have to set up a new agency to deal with dozens or hundreds of bank failures, one similar to the Resolution Trust Corp. formed in the late 1980s. We could see a whole slew of lesser regulations, too, like restrictions on certain lending practices and higher federal coverage limits on bank deposits.
Continued government intervention. The Federal Reserve continues to pump huge sums of money into the global banking system in a desperate effort to prompt banks to loosen their grip on loans to companies, consumers, and one another. For now, that seems to be having little effect as banks absorb the startling news from Washington and hunker down. That may lead the Fed to pump out even more money and take other important steps, like cutting interest rates. Sooner or later, that will probably help loosen things up. Until then, however, it's apparently up to the markets to fix themselves. Plan accordingly.
Monday, September 29, 2008
House rejects $700B bailout in stunning defeat
Monday September 29, 10:06 pm ET By Julie Hirschfeld Davis, Associated Press Writer
House rejects $700B bailout in stunning defeat, driving stocks down; Treasury vows more work
WASHINGTON (AP) -- In a vote that shook the government, Wall Street and markets around the world, the House on Monday defeated a $700 billion emergency rescue for the nation's financial system, leaving both parties' lawmakers and the Bush administration scrambling to pick up the pieces. Dismayed investors sent the Dow Jones industrials plunging 777 points, the most ever for a single day.
"We need to put something back together that works," a grim-faced Treasury Secretary Henry Paulson said after he and Federal Reserve Chairman Ben Bernanke joined in an emergency strategy session at the White House. On Capitol Hill, Democratic leaders said the House would reconvene Thursday, leaving open the possibility that it could salvage a reworked version.
Senate leaders showed no inclination to try to bring the measure to a vote before they could determine its fate in the House. President Bush, meanwhile, was scheduled to make a statement on the rescue plan Tuesday morning, the White House said.
All sides agreed the effort to bolster beleaguered financial markets, potentially the biggest government intervention since the Great Depression, could not be abandoned.
But in a remarkable display on Monday, a majority of House members slapped aside the best version their leaders and the administration had been able to come up with, bucking presidential speeches, pleading visits from Paulson and Federal Reserve Chairman Ben Bernanke and urgent warnings that the economy could nosedive without the legislation.
In the face of thousands of phone calls and e-mails fiercely opposing the measure, many lawmakers were not willing to take the political risk of voting for it just five weeks before the elections.
The bill went down, 228-205.
The House Web site was overwhelmed as millions of people sought information about the measure through the day.
The legislation the administration promoted would have allowed the government to buy bad mortgages and other sour assets held by troubled banks and other financial institutions. Getting those debts off their books should bolster those companies' balance sheets, making them more inclined to lend and ease one of the biggest choke points in a national credit crisis. If the plan worked, the thinking went, it would help lift a major weight off the national economy, which is already sputtering.
Hoping to pick up enough GOP votes for the next try, Republicans floated several ideas. One would double the $100,000 ceiling on federal deposit insurance. Another would end rules that require companies to devalue assets on their books to reflect the price they could get in the market.
In the meantime, Paulson said he would work with other regulators "to use all the tools available to protect our financial system and our economy."
"Our tool kit is substantial but insufficient," he said, indicating the government intended to continue piecemeal fixes while pressing Congress for broader action.
Stocks started plummeting on Wall Street even before Monday's vote was over, as traders watched the rescue measure going down on television. Meanwhile, lawmakers were watching them back.
As a digital screen in the House chamber recorded a cascade of "no" votes against the bailout, Democratic Rep. Joe Crowley of New York shouted news of the falling Dow Jones industrials. "Six hundred points!" he yelled, jabbing his thumb downward.
The final stock carnage far surpassed the 684-point drop on the first trading day after the Sept. 11, 2001, terror attacks.
In the House, "no" votes came from both the Democratic and Republican sides of the aisle. More than two-thirds of Republicans and 40 percent of Democrats opposed the bill. Several Democrats in close election fights waited until the last moment, then went against the bill as it became clear the vast majority of Republicans were opposing it.
Thirteen of the 19 most vulnerable Republicans and Democrats in an Associated Press analysis voted against the bill despite the pleas from Bush and their party leaders to pass it.
In all, 65 Republicans joined 140 Democrats in voting "yes," while 133 Republicans and 95 Democrats voted "no."
The overriding question was what to do next.
"The legislation may have failed; the crisis is still with us," said House Speaker Nancy Pelosi, D-Calif., in a news conference after the defeat. "What happened today cannot stand."
Republican leader John Boehner, R-Ohio, the minority leader, said he and other Republicans were pained to back the measure, but in light of the potential consequences for the economy and all Americans, "We need to renew our efforts to find a solution that Congress can support."
Sen. Chris Dodd, D-Conn., said there was scant time to reopen legislation that was the product of hard-fought bipartisan negotiations.
"What happened today was not a failure of a bill, it was a failure of will," said Dodd, the Banking Committee chairman. "Our hope is that cooler heads will prevail, people will think about what they did today and recognize that this is not just scare tactics -- it's reality."
A brutal round of partisan finger-pointing followed the vote.
Republicans blamed Pelosi's scathing speech near the close of the debate -- which assailed Bush's economic policies and a "right-wing ideology of anything goes, no supervision, no discipline, no regulation" of financial markets -- for the defeat. It was not much different from her usual tough words against the president and his party.
"We could have gotten there today had it not been for the partisan speech that the speaker gave on the floor of the House," Boehner said.
Rep. Roy Blunt, R-Mo., the whip, estimated that Pelosi's speech changed the minds of a dozen Republicans who might otherwise have supported the plan.
That amounted to an appalling accusation by Republicans against Republicans, said Rep. Barney Frank, D-Mass., chairman of the Financial Services Committee: "Because somebody hurt their feelings, they decide to punish the country."
More than a repudiation of Democrats, Frank said, Republicans' refusal to vote for the bailout was a rejection of their own president.
Indeed, many GOP lawmakers spurned Bush's urgent calls for action. "We have a gun to our head," said Rep. Ginny Brown-Waite, R-Fla., who opposed the bill. "This isn't legislation -- it's extortion."
The two men campaigning to replace Bush watched the situation closely -- from afar -- and demanded action.
In Iowa, Republican John McCain said his rival Barack Obama and congressional Democrats "infused unnecessary partisanship into the process. Now is not the time to fix the blame; it's time to fix the problem."
Obama said, "Democrats, Republicans, step up to the plate, get it done."
Lawmakers were under extraordinary pressure from powerful outside groups, which gave notice they considered the legislation a "key vote" -- one they would consider when rating members of Congress.
The U.S. Chamber of Commerce said opponents of the bailout would pay for their stance.
"Make no mistake: When the aftermath of congressional inaction becomes clear, Americans will not tolerate those who stood by and let the calamity happen," said R. Bruce Josten, the Chamber's top lobbyist, in a letter to members.
The conservative Club for Growth made a similar threat to supporters of the bailout.
"We're all worried about losing our jobs," Rep. Paul Ryan, R-Wis., declared in an impassioned speech in support of the bill before the vote. "Most of us say, 'I want this thing to pass, but I want you to vote for it -- not me.'"
"We're in this moment, and if we fail to do the right thing, Heaven help us," he said.
If Congress doesn't come around on a bailout, more pressure would fall on the Federal Reserve.
The Fed, which has been providing billions in short-term loans to squeezed banks to help them overcome credit stresses, could keep expanding those loans to encourage lending. And, it could keep working with other central banks to inject billions into financial markets overseas.
It also has the power to expand emergency lending to other types of companies and even to individuals if they are unable to secure adequate credit.
Associated Press writers Jeannine Aversa, Jim Abrams and Andrew Taylor contributed to this report.
House rejects $700B bailout in stunning defeat, driving stocks down; Treasury vows more work
WASHINGTON (AP) -- In a vote that shook the government, Wall Street and markets around the world, the House on Monday defeated a $700 billion emergency rescue for the nation's financial system, leaving both parties' lawmakers and the Bush administration scrambling to pick up the pieces. Dismayed investors sent the Dow Jones industrials plunging 777 points, the most ever for a single day.
"We need to put something back together that works," a grim-faced Treasury Secretary Henry Paulson said after he and Federal Reserve Chairman Ben Bernanke joined in an emergency strategy session at the White House. On Capitol Hill, Democratic leaders said the House would reconvene Thursday, leaving open the possibility that it could salvage a reworked version.
Senate leaders showed no inclination to try to bring the measure to a vote before they could determine its fate in the House. President Bush, meanwhile, was scheduled to make a statement on the rescue plan Tuesday morning, the White House said.
All sides agreed the effort to bolster beleaguered financial markets, potentially the biggest government intervention since the Great Depression, could not be abandoned.
But in a remarkable display on Monday, a majority of House members slapped aside the best version their leaders and the administration had been able to come up with, bucking presidential speeches, pleading visits from Paulson and Federal Reserve Chairman Ben Bernanke and urgent warnings that the economy could nosedive without the legislation.
In the face of thousands of phone calls and e-mails fiercely opposing the measure, many lawmakers were not willing to take the political risk of voting for it just five weeks before the elections.
The bill went down, 228-205.
The House Web site was overwhelmed as millions of people sought information about the measure through the day.
The legislation the administration promoted would have allowed the government to buy bad mortgages and other sour assets held by troubled banks and other financial institutions. Getting those debts off their books should bolster those companies' balance sheets, making them more inclined to lend and ease one of the biggest choke points in a national credit crisis. If the plan worked, the thinking went, it would help lift a major weight off the national economy, which is already sputtering.
Hoping to pick up enough GOP votes for the next try, Republicans floated several ideas. One would double the $100,000 ceiling on federal deposit insurance. Another would end rules that require companies to devalue assets on their books to reflect the price they could get in the market.
In the meantime, Paulson said he would work with other regulators "to use all the tools available to protect our financial system and our economy."
"Our tool kit is substantial but insufficient," he said, indicating the government intended to continue piecemeal fixes while pressing Congress for broader action.
Stocks started plummeting on Wall Street even before Monday's vote was over, as traders watched the rescue measure going down on television. Meanwhile, lawmakers were watching them back.
As a digital screen in the House chamber recorded a cascade of "no" votes against the bailout, Democratic Rep. Joe Crowley of New York shouted news of the falling Dow Jones industrials. "Six hundred points!" he yelled, jabbing his thumb downward.
The final stock carnage far surpassed the 684-point drop on the first trading day after the Sept. 11, 2001, terror attacks.
In the House, "no" votes came from both the Democratic and Republican sides of the aisle. More than two-thirds of Republicans and 40 percent of Democrats opposed the bill. Several Democrats in close election fights waited until the last moment, then went against the bill as it became clear the vast majority of Republicans were opposing it.
Thirteen of the 19 most vulnerable Republicans and Democrats in an Associated Press analysis voted against the bill despite the pleas from Bush and their party leaders to pass it.
In all, 65 Republicans joined 140 Democrats in voting "yes," while 133 Republicans and 95 Democrats voted "no."
The overriding question was what to do next.
"The legislation may have failed; the crisis is still with us," said House Speaker Nancy Pelosi, D-Calif., in a news conference after the defeat. "What happened today cannot stand."
Republican leader John Boehner, R-Ohio, the minority leader, said he and other Republicans were pained to back the measure, but in light of the potential consequences for the economy and all Americans, "We need to renew our efforts to find a solution that Congress can support."
Sen. Chris Dodd, D-Conn., said there was scant time to reopen legislation that was the product of hard-fought bipartisan negotiations.
"What happened today was not a failure of a bill, it was a failure of will," said Dodd, the Banking Committee chairman. "Our hope is that cooler heads will prevail, people will think about what they did today and recognize that this is not just scare tactics -- it's reality."
A brutal round of partisan finger-pointing followed the vote.
Republicans blamed Pelosi's scathing speech near the close of the debate -- which assailed Bush's economic policies and a "right-wing ideology of anything goes, no supervision, no discipline, no regulation" of financial markets -- for the defeat. It was not much different from her usual tough words against the president and his party.
"We could have gotten there today had it not been for the partisan speech that the speaker gave on the floor of the House," Boehner said.
Rep. Roy Blunt, R-Mo., the whip, estimated that Pelosi's speech changed the minds of a dozen Republicans who might otherwise have supported the plan.
That amounted to an appalling accusation by Republicans against Republicans, said Rep. Barney Frank, D-Mass., chairman of the Financial Services Committee: "Because somebody hurt their feelings, they decide to punish the country."
More than a repudiation of Democrats, Frank said, Republicans' refusal to vote for the bailout was a rejection of their own president.
Indeed, many GOP lawmakers spurned Bush's urgent calls for action. "We have a gun to our head," said Rep. Ginny Brown-Waite, R-Fla., who opposed the bill. "This isn't legislation -- it's extortion."
The two men campaigning to replace Bush watched the situation closely -- from afar -- and demanded action.
In Iowa, Republican John McCain said his rival Barack Obama and congressional Democrats "infused unnecessary partisanship into the process. Now is not the time to fix the blame; it's time to fix the problem."
Obama said, "Democrats, Republicans, step up to the plate, get it done."
Lawmakers were under extraordinary pressure from powerful outside groups, which gave notice they considered the legislation a "key vote" -- one they would consider when rating members of Congress.
The U.S. Chamber of Commerce said opponents of the bailout would pay for their stance.
"Make no mistake: When the aftermath of congressional inaction becomes clear, Americans will not tolerate those who stood by and let the calamity happen," said R. Bruce Josten, the Chamber's top lobbyist, in a letter to members.
The conservative Club for Growth made a similar threat to supporters of the bailout.
"We're all worried about losing our jobs," Rep. Paul Ryan, R-Wis., declared in an impassioned speech in support of the bill before the vote. "Most of us say, 'I want this thing to pass, but I want you to vote for it -- not me.'"
"We're in this moment, and if we fail to do the right thing, Heaven help us," he said.
If Congress doesn't come around on a bailout, more pressure would fall on the Federal Reserve.
The Fed, which has been providing billions in short-term loans to squeezed banks to help them overcome credit stresses, could keep expanding those loans to encourage lending. And, it could keep working with other central banks to inject billions into financial markets overseas.
It also has the power to expand emergency lending to other types of companies and even to individuals if they are unable to secure adequate credit.
Associated Press writers Jeannine Aversa, Jim Abrams and Andrew Taylor contributed to this report.
Dow plummets record 777 as financial rescue fails
Monday September 29, 10:08 pm ET By Tim Paradis, AP Business Writer
Dow dives 777 points, biggest single day fall ever, as House rejects financial bailout package
NEW YORK (AP) -- The failure of the bailout package in Congress literally dropped jaws on Wall Street and triggered a historic selloff -- including a terrifying decline of nearly 500 points in mere minutes as the vote took place, the closest thing to panic the stock market has seen in years.
The Dow Jones industrial average lost 777 points Monday, its biggest single-day fall ever, easily beating the 684 points it lost on the first day of trading after the Sept. 11, 2001, terrorist attacks.
As uncertainty gripped investors, the credit markets, which provide the day-to-day lending that powers business in the United States, froze up even further.
At the New York Stock Exchange, traders watched with faces tense and mouths agape as TV screens showed the House vote rejecting the Bush administration's $700 billion plan to buy up bad debt and shore up the financial industry.
Activity on the trading floor became frenetic as the "sell" orders blew in. The selling was so intense that just 162 stocks on the Big Board rose, while 3,073 dropped.
The Dow Jones Wilshire 5000 Composite Index recorded a paper loss of $1 trillion across the market for the day, a first.
The Dow industrials, which were down 210 points at 1:30 p.m. EDT, nose-dived as traders on Wall Street and investors across the country saw "no" votes piling up on live TV feeds of the House vote.
By 1:42 p.m., the decline was 292 points. Then the bottom fell out. Within five minutes, the index was down about 700 points as it became clear the bill was doomed.
"How could this have happened? Is there such a disconnect on Capitol Hill? This becomes a problem because Wall Street is very uncomfortable with uncertainty," said Gordon Charlop, managing director with Rosenblatt Securities.
"The bailout not going through sends a signal that Congress isn't willing to do their part," he added.
While investors didn't believe that the plan was a cure-all and it could take months for its effects to be felt, most market watchers believed it was at least a start toward setting the economy right and unlocking credit.
"Clearly something needs to be done, and the market dropping 400 points in 10 minutes is telling you that," said Chris Johnson, president of Johnson Research Group. "This isn't a market for the timid."
Before trading even began came word that Wachovia Corp., one of the biggest banks to struggle from rising mortgage losses, was being rescued in a buyout by Citigroup Inc.
That followed the recent forced sale of Merrill Lynch & Co. and the failure of three other huge banking companies -- Bear Stearns Cos., Washington Mutual Inc. and Lehman Brothers Holdings Inc., all of them felled by bad mortgage investments.
And it raised the question: Which banks are next, and how many? The Federal Deposit Insurance Corp. lists more than 110 banks in trouble in the second quarter, and the number has probably grown since.
Wall Street is contending with all of it against the backdrop of a credit market -- where bonds and loans are bought and sold -- that is barely functioning because of fears that anyone lending money will never be paid back.
More evidence could be found Monday in the Treasury's three-month bill, where investors were stashing money, willing to accept the tiniest of returns simply to be sure that their principal would survive. The yield on the three-month bill was 0.15 percent, down from 0.87 percent and approaching zero, a level reached last week when fear was also running high.
Analysts said the government needs to find a way to help restore confidence in the markets.
"It's probably fair to say that we are not going to see any significant stability in the credit markets or the stock market until we see some sort of rescue package passed," said Fred Dickson, director of retail research for D.A. Davidson & Co.
The bailout bill failed 228-205 in the House, and Democratic leaders said the House would reconvene Thursday in hopes of a quick vote on a revised bill.
"We need to put something back together that works," Treasury Secretary Henry Paulson said. "We need it as soon as possible."
The Dow fell 777.68 points, just shy of 7 percent, to 10,365.45, its lowest close in nearly three years. The decline also surpasses the record for the biggest decline during a trading day -- 721.56 at one point on Sept. 17, 2001, when the market reopened after 9/11.
In percentage terms, it was only the 17th-biggest decline for the Dow, far less severe than the 20-plus-percent drops seen on Black Monday in 1987 and before the Great Depression.
Broader stock indicators also plummeted. The Standard & Poor's 500 index declined 106.62, or nearly 9 percent, to 1,106.39. It was the S&P's largest-ever point drop and its biggest percentage loss since the week after the October 1987 crash.
The Nasdaq composite index fell 199.61, more than 9 percent, to 1,983.73, its third-worst percentage decline. The Russell 2000 index of smaller companies fell 47.07, or 6.7 percent, to 657.72.
A huge drop in oil prices was another sign of the economic chaos that investors fear. Light, sweet crude fell $10.52 to settle at $96.36 on the New York Mercantile Exchange as investors feared energy demand would continue to slide amid further economic weakness. And gold, where investors flock when they need a relatively secure investment, rose $23.20 to $911.70 on the Nymex.
Marc Pado, U.S. market strategist at Cantor Fitzgerald, said investors are worried about the spread of troubles beyond banks in the U.S. to Europe and other markets.
"Things are dying and breaking apart," he said.
The federal Office of Thrift Supervision, one of the government's banking regulators, indicated that the market was overreacting to the House vote and that its fears about the financial system are misplaced.
"There is an irrational financial panic taking place today, and we support and applaud the continuing efforts of Secretary Paulson and congressional leadership to restore liquidity and public confidence," John Reich, Director of the federal Office of Thrift Supervision, said in a statement.
The plan would have placed caps on pay packages of top executives that accepted help from the government, and included assurances the government would ultimately be reimbursed by the companies for any losses.
The Treasury would have been permitted to spend $250 billion to buy banks' risky assets, giving them a much-needed cash infusion. There also would be another $100 billion for use at the president's discretion and a final $350 billion if Congress signs off.
But Wall Street found further reason for worry overseas. Three European governments agreed to a $16.4 billion bailout for Fortis NV, Belgium's largest retail bank, and the British government said it was nationalizing mortgage lender Bradford & Bingley, which has a $91 billion mortgage and loan portfolio. It was the latest sign that the credit crisis has spread beyond the U.S.
Business Writers Joe Bel Bruno in New York and Christopher S. Rugaber in Washington contributed to this report.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Dow dives 777 points, biggest single day fall ever, as House rejects financial bailout package
NEW YORK (AP) -- The failure of the bailout package in Congress literally dropped jaws on Wall Street and triggered a historic selloff -- including a terrifying decline of nearly 500 points in mere minutes as the vote took place, the closest thing to panic the stock market has seen in years.
The Dow Jones industrial average lost 777 points Monday, its biggest single-day fall ever, easily beating the 684 points it lost on the first day of trading after the Sept. 11, 2001, terrorist attacks.
As uncertainty gripped investors, the credit markets, which provide the day-to-day lending that powers business in the United States, froze up even further.
At the New York Stock Exchange, traders watched with faces tense and mouths agape as TV screens showed the House vote rejecting the Bush administration's $700 billion plan to buy up bad debt and shore up the financial industry.
Activity on the trading floor became frenetic as the "sell" orders blew in. The selling was so intense that just 162 stocks on the Big Board rose, while 3,073 dropped.
The Dow Jones Wilshire 5000 Composite Index recorded a paper loss of $1 trillion across the market for the day, a first.
The Dow industrials, which were down 210 points at 1:30 p.m. EDT, nose-dived as traders on Wall Street and investors across the country saw "no" votes piling up on live TV feeds of the House vote.
By 1:42 p.m., the decline was 292 points. Then the bottom fell out. Within five minutes, the index was down about 700 points as it became clear the bill was doomed.
"How could this have happened? Is there such a disconnect on Capitol Hill? This becomes a problem because Wall Street is very uncomfortable with uncertainty," said Gordon Charlop, managing director with Rosenblatt Securities.
"The bailout not going through sends a signal that Congress isn't willing to do their part," he added.
While investors didn't believe that the plan was a cure-all and it could take months for its effects to be felt, most market watchers believed it was at least a start toward setting the economy right and unlocking credit.
"Clearly something needs to be done, and the market dropping 400 points in 10 minutes is telling you that," said Chris Johnson, president of Johnson Research Group. "This isn't a market for the timid."
Before trading even began came word that Wachovia Corp., one of the biggest banks to struggle from rising mortgage losses, was being rescued in a buyout by Citigroup Inc.
That followed the recent forced sale of Merrill Lynch & Co. and the failure of three other huge banking companies -- Bear Stearns Cos., Washington Mutual Inc. and Lehman Brothers Holdings Inc., all of them felled by bad mortgage investments.
And it raised the question: Which banks are next, and how many? The Federal Deposit Insurance Corp. lists more than 110 banks in trouble in the second quarter, and the number has probably grown since.
Wall Street is contending with all of it against the backdrop of a credit market -- where bonds and loans are bought and sold -- that is barely functioning because of fears that anyone lending money will never be paid back.
More evidence could be found Monday in the Treasury's three-month bill, where investors were stashing money, willing to accept the tiniest of returns simply to be sure that their principal would survive. The yield on the three-month bill was 0.15 percent, down from 0.87 percent and approaching zero, a level reached last week when fear was also running high.
Analysts said the government needs to find a way to help restore confidence in the markets.
"It's probably fair to say that we are not going to see any significant stability in the credit markets or the stock market until we see some sort of rescue package passed," said Fred Dickson, director of retail research for D.A. Davidson & Co.
The bailout bill failed 228-205 in the House, and Democratic leaders said the House would reconvene Thursday in hopes of a quick vote on a revised bill.
"We need to put something back together that works," Treasury Secretary Henry Paulson said. "We need it as soon as possible."
The Dow fell 777.68 points, just shy of 7 percent, to 10,365.45, its lowest close in nearly three years. The decline also surpasses the record for the biggest decline during a trading day -- 721.56 at one point on Sept. 17, 2001, when the market reopened after 9/11.
In percentage terms, it was only the 17th-biggest decline for the Dow, far less severe than the 20-plus-percent drops seen on Black Monday in 1987 and before the Great Depression.
Broader stock indicators also plummeted. The Standard & Poor's 500 index declined 106.62, or nearly 9 percent, to 1,106.39. It was the S&P's largest-ever point drop and its biggest percentage loss since the week after the October 1987 crash.
The Nasdaq composite index fell 199.61, more than 9 percent, to 1,983.73, its third-worst percentage decline. The Russell 2000 index of smaller companies fell 47.07, or 6.7 percent, to 657.72.
A huge drop in oil prices was another sign of the economic chaos that investors fear. Light, sweet crude fell $10.52 to settle at $96.36 on the New York Mercantile Exchange as investors feared energy demand would continue to slide amid further economic weakness. And gold, where investors flock when they need a relatively secure investment, rose $23.20 to $911.70 on the Nymex.
Marc Pado, U.S. market strategist at Cantor Fitzgerald, said investors are worried about the spread of troubles beyond banks in the U.S. to Europe and other markets.
"Things are dying and breaking apart," he said.
The federal Office of Thrift Supervision, one of the government's banking regulators, indicated that the market was overreacting to the House vote and that its fears about the financial system are misplaced.
"There is an irrational financial panic taking place today, and we support and applaud the continuing efforts of Secretary Paulson and congressional leadership to restore liquidity and public confidence," John Reich, Director of the federal Office of Thrift Supervision, said in a statement.
The plan would have placed caps on pay packages of top executives that accepted help from the government, and included assurances the government would ultimately be reimbursed by the companies for any losses.
The Treasury would have been permitted to spend $250 billion to buy banks' risky assets, giving them a much-needed cash infusion. There also would be another $100 billion for use at the president's discretion and a final $350 billion if Congress signs off.
But Wall Street found further reason for worry overseas. Three European governments agreed to a $16.4 billion bailout for Fortis NV, Belgium's largest retail bank, and the British government said it was nationalizing mortgage lender Bradford & Bingley, which has a $91 billion mortgage and loan portfolio. It was the latest sign that the credit crisis has spread beyond the U.S.
Business Writers Joe Bel Bruno in New York and Christopher S. Rugaber in Washington contributed to this report.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Monday, September 22, 2008
Microsoft to buy back $40 billion of stock
Monday September 22, 9:19 am ET
Microsoft board OKs $40 billion stock buyback plan, raises dividend
REDMOND, Wash. (AP) -- Software giant Microsoft Corp. said Monday its board approved a plan to buy back up to another $40 billion of its shares.
The program expires on Sept. 30, 2013. As of July 28, Redmond, Wash.-based Microsoft had about 9.13 billion shares outstanding, according to a regulatory filing.
The company said it has completed its previous $40 billion stock repurchase program.
Microsoft also raised its quarterly dividend to 13 cents from 11 cents. The dividend is payable Dec. 11 to shareholders of record on Nov. 20.
The company's board has also authorized debt financings of up to $6 billion. As part of this authorization, Microsoft has established a $2 billion commercial paper program. The company plans to use the proceeds for general corporate purposes, including buybacks and funding for working capital.
On Monday, Moody's Investors service assigned an "Aaa" senior unsecured debt rating to Microsoft, with a stable outlook. The ratings agency said this reflects the company's "position as the world's largest software company with a strong and defensible market position throughout its diverse core offerings."
Microsoft also said it received a "AAA" corporate credit rating from Standard & Poor's Rating Services.
Shares rose $1.22, or 4.9 percent, to $26.38 in premarket trading.
Microsoft board OKs $40 billion stock buyback plan, raises dividend
REDMOND, Wash. (AP) -- Software giant Microsoft Corp. said Monday its board approved a plan to buy back up to another $40 billion of its shares.
The program expires on Sept. 30, 2013. As of July 28, Redmond, Wash.-based Microsoft had about 9.13 billion shares outstanding, according to a regulatory filing.
The company said it has completed its previous $40 billion stock repurchase program.
Microsoft also raised its quarterly dividend to 13 cents from 11 cents. The dividend is payable Dec. 11 to shareholders of record on Nov. 20.
The company's board has also authorized debt financings of up to $6 billion. As part of this authorization, Microsoft has established a $2 billion commercial paper program. The company plans to use the proceeds for general corporate purposes, including buybacks and funding for working capital.
On Monday, Moody's Investors service assigned an "Aaa" senior unsecured debt rating to Microsoft, with a stable outlook. The ratings agency said this reflects the company's "position as the world's largest software company with a strong and defensible market position throughout its diverse core offerings."
Microsoft also said it received a "AAA" corporate credit rating from Standard & Poor's Rating Services.
Shares rose $1.22, or 4.9 percent, to $26.38 in premarket trading.
World stocks mixed on proposed US bailout
Monday September 22, 7:45 am ET By Louise Watt, Associated Press Writer
World markets mixed on US bailout plan; China stock index jumps 7.8 percent
LONDON (AP) -- Global markets were mixed Monday as investors awaited more developments in the U.S. government's $700 billion plan to rescue banks from risky mortgage debt.
European markets, after edging higher in early trading, had fallen by afternoon in Europe and Wall Street futures were lower ahead of the New York opening. Asian markets had risen earlier.
Britain's FTSE 100 lost 0.39 percent to 5,290.82 by midday Monday, Germany's DAX slumped 0.30 percent to 6,170.83 and France's CAC 40 dropped 0.11 percent to 4,320.01.
"There was massive reaction on Friday, today there is an element of profit-taking and a bit of reality of people worrying about the world economy as we see the price of oil move higher again," said Stephen Pope, chief global markets strategist for Cantor Fitzgerald.
"As the week develops there should be some concrete proposals coming through," he added.
Wall Street appeared headed to a lower start. Dow Jones industrial average futures were down 78, or 0.69 percent, to 11,277. Standard & Poor's 500 index futures fell 7.30, or 0.59 percent, to 1,238.70. Nasdaq 100 index futures fell 7.00, or 0.40 percent, to 1,732.50.
In Asia, investors were more upbeat. In Japan, the Nikkei 225 index rose 1.4 percent to close at 12,090.59 points, while Hong Kong's Hang Seng Index rose 1.6 percent to 19,632.20.
In China, the Shanghai Composite Index soared 7.8 percent on hopes of a turnaround after government steps to stabilize the country's beaten down shares. Markets in Australia and Taiwan advanced strongly after their regulators issued curbs on short selling, following similar moves in the U.S., Britain and other countries. The practice, which bets on a stock's decline, has been partly blamed for driving down share prices.
Global markets had rallied Friday on news Washington was likely to enact a bailout plan, calming investors worried that losses from bad bets on mortgages could bring about the collapse of more companies, straining an already weakened financial system and global economy.
As a rough outline of the plan took shape over the weekend, the Bush administration continued to lobby lawmakers Sunday for authority to use $700 billion to buy up a mountain of bad debt at the heart of the crisis.
While the proposed bailout lifted sentiment for the time being, there were still a number of uncertainties about the plan and the general health of financial firms that could further unsettle markets in the coming days, an analyst said.
"This should stem the bleeding, but the patient is still very fragile," said Thomas Lam, a senior economist at the United Overseas Bank in Singapore. "The list of uncertainties is pretty long."
Meanwhile, cash demand showed some signs of easing as European central banks offered more liquidity to money markets.
According to the Bank of England, it offered $40 billion in a one-day tender, for which the bank said it received $26 billion in bids, but didn't indicate from how many banks.
But the European Central Bank said it received bids worth $82.1 billion for the $40 billion it offered in a one-day transaction, or more than double what it had offered.
Japan's central bank pumped another 1.5 trillion yen ($14.1 billion) into short-term money markets, the ninth injection over five straight working days.
Monday's moves come after central banks in Britain, Canada, the United States, Japan and Canada last week supplied cash to banks that had become wary of lending to one another in the aftermath of the bailout of AIG and the bankruptcy of Lehman Brothers. Banks have been increasingly reluctant to lend to each other as distrust spread throughout the financial system.
Financial stocks, battered in recent weeks, were among leaders in Asia.
Japanese banking giant Mitsubishi UFJ Financial Group Inc. shot up more than 5.2 percent, while leading Australian firm Macquarie Group Ltd. climbed 5.3 percent. In Hong Kong, Industrial & Commercial Bank of China, the country's biggest, was up 2.4 percent.
In mainland China, share prices surged on strong buying of financial shares after the government announced plans to buy shares in major state-owned banks and other measures.
After watching share prices slide for almost a year, the government moved to support the stock market last week in response to the global financial crisis triggered by problems with bad debt in the U.S.
Comments by Premier Wen Jiabao over the weekend urging support for the financial system and market stability also boosted buying sentiment, analysts said.
"According to our analysis, this could be a turning point for the market, not just a brief rebound," said Zhang Xiuqi, a strategist for Guotai Junan Securities in Shanghai. "Market sentiment is finally recovering."
The Shanghai benchmark still is down 57 percent for the year.
Elsewhere, Australia's &P/ASX 200 index jumped 4.5 percent and Taiwan's benchmark rose 2.3 percent.
In Russia, stocks inched up following big gains for all indexes last week, with the U.S. dollar-denominated RTS adding 1.6 percent.
The advances came after an another extraordinary rally on Wall Street on Friday. The Dow Jones industrials soared about 370 points, or 3.35 percent, to 11,388.44, giving the index a gain of about 780 points over two days.
U.S. stock index futures were down, though, suggesting Wall Street may open lower. The S&P 500 futures index was down 8.3 points, or 0.7 percent, to 1,237.2.
Light, sweet crude for October delivery was up $1.41 to $105.96 a barrel in electronic trading on the New York Mercantile Exchange by afternoon in Europe. The contract soared $6.67 Friday.
AP Business Writers Jeremiah Marquez in Hong Kong and Elaine Kurtenbach in Shanghai contributed to this report.
World markets mixed on US bailout plan; China stock index jumps 7.8 percent
LONDON (AP) -- Global markets were mixed Monday as investors awaited more developments in the U.S. government's $700 billion plan to rescue banks from risky mortgage debt.
European markets, after edging higher in early trading, had fallen by afternoon in Europe and Wall Street futures were lower ahead of the New York opening. Asian markets had risen earlier.
Britain's FTSE 100 lost 0.39 percent to 5,290.82 by midday Monday, Germany's DAX slumped 0.30 percent to 6,170.83 and France's CAC 40 dropped 0.11 percent to 4,320.01.
"There was massive reaction on Friday, today there is an element of profit-taking and a bit of reality of people worrying about the world economy as we see the price of oil move higher again," said Stephen Pope, chief global markets strategist for Cantor Fitzgerald.
"As the week develops there should be some concrete proposals coming through," he added.
Wall Street appeared headed to a lower start. Dow Jones industrial average futures were down 78, or 0.69 percent, to 11,277. Standard & Poor's 500 index futures fell 7.30, or 0.59 percent, to 1,238.70. Nasdaq 100 index futures fell 7.00, or 0.40 percent, to 1,732.50.
In Asia, investors were more upbeat. In Japan, the Nikkei 225 index rose 1.4 percent to close at 12,090.59 points, while Hong Kong's Hang Seng Index rose 1.6 percent to 19,632.20.
In China, the Shanghai Composite Index soared 7.8 percent on hopes of a turnaround after government steps to stabilize the country's beaten down shares. Markets in Australia and Taiwan advanced strongly after their regulators issued curbs on short selling, following similar moves in the U.S., Britain and other countries. The practice, which bets on a stock's decline, has been partly blamed for driving down share prices.
Global markets had rallied Friday on news Washington was likely to enact a bailout plan, calming investors worried that losses from bad bets on mortgages could bring about the collapse of more companies, straining an already weakened financial system and global economy.
As a rough outline of the plan took shape over the weekend, the Bush administration continued to lobby lawmakers Sunday for authority to use $700 billion to buy up a mountain of bad debt at the heart of the crisis.
While the proposed bailout lifted sentiment for the time being, there were still a number of uncertainties about the plan and the general health of financial firms that could further unsettle markets in the coming days, an analyst said.
"This should stem the bleeding, but the patient is still very fragile," said Thomas Lam, a senior economist at the United Overseas Bank in Singapore. "The list of uncertainties is pretty long."
Meanwhile, cash demand showed some signs of easing as European central banks offered more liquidity to money markets.
According to the Bank of England, it offered $40 billion in a one-day tender, for which the bank said it received $26 billion in bids, but didn't indicate from how many banks.
But the European Central Bank said it received bids worth $82.1 billion for the $40 billion it offered in a one-day transaction, or more than double what it had offered.
Japan's central bank pumped another 1.5 trillion yen ($14.1 billion) into short-term money markets, the ninth injection over five straight working days.
Monday's moves come after central banks in Britain, Canada, the United States, Japan and Canada last week supplied cash to banks that had become wary of lending to one another in the aftermath of the bailout of AIG and the bankruptcy of Lehman Brothers. Banks have been increasingly reluctant to lend to each other as distrust spread throughout the financial system.
Financial stocks, battered in recent weeks, were among leaders in Asia.
Japanese banking giant Mitsubishi UFJ Financial Group Inc. shot up more than 5.2 percent, while leading Australian firm Macquarie Group Ltd. climbed 5.3 percent. In Hong Kong, Industrial & Commercial Bank of China, the country's biggest, was up 2.4 percent.
In mainland China, share prices surged on strong buying of financial shares after the government announced plans to buy shares in major state-owned banks and other measures.
After watching share prices slide for almost a year, the government moved to support the stock market last week in response to the global financial crisis triggered by problems with bad debt in the U.S.
Comments by Premier Wen Jiabao over the weekend urging support for the financial system and market stability also boosted buying sentiment, analysts said.
"According to our analysis, this could be a turning point for the market, not just a brief rebound," said Zhang Xiuqi, a strategist for Guotai Junan Securities in Shanghai. "Market sentiment is finally recovering."
The Shanghai benchmark still is down 57 percent for the year.
Elsewhere, Australia's &P/ASX 200 index jumped 4.5 percent and Taiwan's benchmark rose 2.3 percent.
In Russia, stocks inched up following big gains for all indexes last week, with the U.S. dollar-denominated RTS adding 1.6 percent.
The advances came after an another extraordinary rally on Wall Street on Friday. The Dow Jones industrials soared about 370 points, or 3.35 percent, to 11,388.44, giving the index a gain of about 780 points over two days.
U.S. stock index futures were down, though, suggesting Wall Street may open lower. The S&P 500 futures index was down 8.3 points, or 0.7 percent, to 1,237.2.
Light, sweet crude for October delivery was up $1.41 to $105.96 a barrel in electronic trading on the New York Mercantile Exchange by afternoon in Europe. The contract soared $6.67 Friday.
AP Business Writers Jeremiah Marquez in Hong Kong and Elaine Kurtenbach in Shanghai contributed to this report.
Last major investment banks change status
Monday September 22, 8:41 am ET By Martin Crutsinger
Federal Reserve changes status of Goldman Sachs and Morgan Stanley to bank holding companies
WASHINGTON (AP) -- It was the end of an era on Wall Street as the Federal Reserve granted permission for the last two major investment banks -- Goldman Sachs and Morgan Stanley -- to become bank holding companies in order to stay in business.
The Fed announced late Sunday evening that it had approved the request, which will allow Goldman and Morgan Stanley to create commercial banks that can take deposits, bolstering the resources of both institutions.
The change is the latest seismic shift on Wall Street as the financial system tries to cope with mounting problems that began more than a year ago with the subprime mortgage crisis.
Shares of Morgan Stanley slipped 3.3 percent and Goldman's fell 2.8 percent in premarket electronic trading on Monday. Overall, U.S. stocks appeared headed for a slightly lower opening as investors remained nervous about the U.S. government's plan to buy $700 billion in soured bank mortgage debt.
After weekend meetings where the Treasury Department, Fed and congressional staff ironed out the program's details, Sen. Christopher Dodd said Monday it's equally important to act responsibly as it is to move quickly on the legislation needed to stabilize the country's troubled financial markets.
Dodd, chairman of the Senate Banking committee, said on CBS's "The Early Show" that many members of Congress believe a legislative relief package also should be tailored to protect taxpayers in the best way possible.
Democrats in Congress said they will add provisions in the bailout measure to protect people in danger of losing their homes and measures to cap executive compensation at firms who get to unload their bad mortgages debt onto the government.
But the proposal is still expected to win quick congressional passage because both parties are concerned about the adverse reaction in financial markets should the measure look like it is being delayed.
The Fed's board of governors granted the investment banks' requests by unanimous vote during a late Sunday meeting in Washington.
The change of status means both companies will come under the direct regulation of the Fed, which oversees the nation's bank holding companies. The banking subsidiaries of the two institutions will face the stricter regulations that commercial banks are required to meet. Previously, the primary regulator for Goldman and Morgan Stanley was the Securities and Exchange Commission.
Shares of both institutions had come under pressure ever since the bankruptcy filing last week by investment bank Lehman Brothers and the forced sale of investment bank Merrill Lynch to Bank of America.
Three people familiar with the matter said Monday that Japan's largest brokerage Nomura Holdings is buying Lehman's Asian assets. Britains Barclay's Bank received bankruptcy court approval early Saturday morning to purchase Lehman's North American brokerage operations.
Investors feared that the last remaining independent investment banks would not be able to survive in their current form, especially after hedge funds saw some of their funds at Lehman Brothers frozen as part of its bankruptcy. There had been speculation that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding.
In the surprise announcement late Sunday, the central bank said Goldman and Morgan Stanley would be allowed during a transition period to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.
The Fed said its action would take final effect after a five-day waiting period required under law.
The decision means that Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed's emergency loan program.
After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks. However, that extension was granted on a temporary basis.
Federal Reserve changes status of Goldman Sachs and Morgan Stanley to bank holding companies
WASHINGTON (AP) -- It was the end of an era on Wall Street as the Federal Reserve granted permission for the last two major investment banks -- Goldman Sachs and Morgan Stanley -- to become bank holding companies in order to stay in business.
The Fed announced late Sunday evening that it had approved the request, which will allow Goldman and Morgan Stanley to create commercial banks that can take deposits, bolstering the resources of both institutions.
The change is the latest seismic shift on Wall Street as the financial system tries to cope with mounting problems that began more than a year ago with the subprime mortgage crisis.
Shares of Morgan Stanley slipped 3.3 percent and Goldman's fell 2.8 percent in premarket electronic trading on Monday. Overall, U.S. stocks appeared headed for a slightly lower opening as investors remained nervous about the U.S. government's plan to buy $700 billion in soured bank mortgage debt.
After weekend meetings where the Treasury Department, Fed and congressional staff ironed out the program's details, Sen. Christopher Dodd said Monday it's equally important to act responsibly as it is to move quickly on the legislation needed to stabilize the country's troubled financial markets.
Dodd, chairman of the Senate Banking committee, said on CBS's "The Early Show" that many members of Congress believe a legislative relief package also should be tailored to protect taxpayers in the best way possible.
Democrats in Congress said they will add provisions in the bailout measure to protect people in danger of losing their homes and measures to cap executive compensation at firms who get to unload their bad mortgages debt onto the government.
But the proposal is still expected to win quick congressional passage because both parties are concerned about the adverse reaction in financial markets should the measure look like it is being delayed.
The Fed's board of governors granted the investment banks' requests by unanimous vote during a late Sunday meeting in Washington.
The change of status means both companies will come under the direct regulation of the Fed, which oversees the nation's bank holding companies. The banking subsidiaries of the two institutions will face the stricter regulations that commercial banks are required to meet. Previously, the primary regulator for Goldman and Morgan Stanley was the Securities and Exchange Commission.
Shares of both institutions had come under pressure ever since the bankruptcy filing last week by investment bank Lehman Brothers and the forced sale of investment bank Merrill Lynch to Bank of America.
Three people familiar with the matter said Monday that Japan's largest brokerage Nomura Holdings is buying Lehman's Asian assets. Britains Barclay's Bank received bankruptcy court approval early Saturday morning to purchase Lehman's North American brokerage operations.
Investors feared that the last remaining independent investment banks would not be able to survive in their current form, especially after hedge funds saw some of their funds at Lehman Brothers frozen as part of its bankruptcy. There had been speculation that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding.
In the surprise announcement late Sunday, the central bank said Goldman and Morgan Stanley would be allowed during a transition period to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.
The Fed said its action would take final effect after a five-day waiting period required under law.
The decision means that Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed's emergency loan program.
After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks. However, that extension was granted on a temporary basis.
Saturday, September 20, 2008
Judge says Lehman can sell units to Barclays
Saturday September 20, 6:32 am ET By Vinnee Tong, AP Business Writer
Bankruptcy judge approves Lehman Brothers sale of key businesses to Barclays
NEW YORK (AP) -- A bankruptcy judge approved a plan just after midnight Saturday under which Lehman Brothers will sell its investment banking and trading businesses to Barclays.
The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman's Midtown Manhattan office tower.
Lehman filed the biggest bankruptcy in U.S. history Monday, after Barclays declined to buy the investment bank in its entirety.
The British bank will take control of Lehman units that employ about 9,000 employees in the U.S.
"Not only is the sale a good match economically, but it will save the jobs of thousands of employees," Lehman lawyer Harvey Miller of Weil, Gotshal & Manges said.
Barclays took on a potential liability of $2.5 billion to be paid as severance, in case it decides not to keep certain Lehman employees beyond the guaranteed 90 days. But observers have said Barclays' main reason for acquiring Lehman is to get its people and presence in North America, making widespread layoffs less likely.
"It's unimaginable to me that they can run the business without people," said Lehman's financial adviser, Barry Ridings, of Lazard Ltd.
Barclays had little competition to land the deal.
Miller said that before it filed for bankruptcy, Lehman had negotiated with just one other bidder, Bank of America Corp. BofA instead announced Monday that it would buy Merrill Lynch & Co., saving it from a fate similar to Lehman's. That deal was originally valued at $50 billion.
Miller said that since Lehman filed for bankruptcy, Barclays had been the only buyer to express interest in acquiring even parts of the 158-year-old investment bank.
Lehman lawyers announced a number of changes to the deal before the hearing, which started at 4:30 p.m. Friday and continued well past midnight Saturday.
Lehman lawyers said the value of stock Barclays will buy and liabilities it will assume has fallen since the start of the week due to market volatility. Under the new deal, Barclays will buy $47.4 billion in securities and assume $45.5 billion in liabilities.
Barclays also said it would buy three additional units -- Lehman Brothers Canada Inc., Argentina-based Lehman Brothers Sudamerica SA and Lehman Brothers Uruguay SA. The two South American entities are part of Lehman's money management business. Barclays is not paying extra to get the three units.
There was no change to a $250 million goodwill payment and the purchase of two data centers in New Jersey that will go to Barclays, although Barclays may pay less for them. Lehman's investment management business Neuberger Berman was not bought by Barclays.
The Securities Investor Protection Corporation liquidated Lehman accounts on Friday under a bankruptcy-style process to transfer assets from 639,000 Lehman customer accounts -- about 130,000 of which are owned by individual investors -- to Barclays accounts.
"The substance of this transaction is to continue a business for the benefit of the economy," Lehman lawyer Miller said in court.
The hearing drew more than 200 lawyers and observers, who spilled into overflow rooms on two floors of the U.S. Bankruptcy Court in Lower Manhattan.
In response to the extraordinary events of the week, the Bush administration announced Friday the biggest proposed government intervention in financial markets since the Great Depression. Some are calling it an "RTC-style bailout" in reference to the government-owned Resolution Trust Corp. that wound down the assets of Savings and Loan Associations, mostly in the 1980s.
"Somehow Lehman Brothers gets left on the sidelines," said Daniel Golden of Akin Gump Strauss Hauer & Feld LLP, who represents clients holding about $9 billion in bonds. "We believe this was a flawed sales process. It benefits Barclays and the federal government but not the creditors of this estate.
"The economic landscape seems to have changed over the last two days," he said. "Yet the debtors and the Fed seem determined that nothing get in the way of this transaction."
Had Lehman filed for Chapter 11 a week later than it had, its fate may have been different.
"This is a tragedy -- maybe we missed the RTC by a week," Miller said.
"That occurred to me, as well," the judge in the case, James Peck, said. "Lehman Brothers became a victim, in effect the only true icon to fall in the tsunami that has befallen the credit markets."
Bankruptcy judge approves Lehman Brothers sale of key businesses to Barclays
NEW YORK (AP) -- A bankruptcy judge approved a plan just after midnight Saturday under which Lehman Brothers will sell its investment banking and trading businesses to Barclays.
The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman's Midtown Manhattan office tower.
Lehman filed the biggest bankruptcy in U.S. history Monday, after Barclays declined to buy the investment bank in its entirety.
The British bank will take control of Lehman units that employ about 9,000 employees in the U.S.
"Not only is the sale a good match economically, but it will save the jobs of thousands of employees," Lehman lawyer Harvey Miller of Weil, Gotshal & Manges said.
Barclays took on a potential liability of $2.5 billion to be paid as severance, in case it decides not to keep certain Lehman employees beyond the guaranteed 90 days. But observers have said Barclays' main reason for acquiring Lehman is to get its people and presence in North America, making widespread layoffs less likely.
"It's unimaginable to me that they can run the business without people," said Lehman's financial adviser, Barry Ridings, of Lazard Ltd.
Barclays had little competition to land the deal.
Miller said that before it filed for bankruptcy, Lehman had negotiated with just one other bidder, Bank of America Corp. BofA instead announced Monday that it would buy Merrill Lynch & Co., saving it from a fate similar to Lehman's. That deal was originally valued at $50 billion.
Miller said that since Lehman filed for bankruptcy, Barclays had been the only buyer to express interest in acquiring even parts of the 158-year-old investment bank.
Lehman lawyers announced a number of changes to the deal before the hearing, which started at 4:30 p.m. Friday and continued well past midnight Saturday.
Lehman lawyers said the value of stock Barclays will buy and liabilities it will assume has fallen since the start of the week due to market volatility. Under the new deal, Barclays will buy $47.4 billion in securities and assume $45.5 billion in liabilities.
Barclays also said it would buy three additional units -- Lehman Brothers Canada Inc., Argentina-based Lehman Brothers Sudamerica SA and Lehman Brothers Uruguay SA. The two South American entities are part of Lehman's money management business. Barclays is not paying extra to get the three units.
There was no change to a $250 million goodwill payment and the purchase of two data centers in New Jersey that will go to Barclays, although Barclays may pay less for them. Lehman's investment management business Neuberger Berman was not bought by Barclays.
The Securities Investor Protection Corporation liquidated Lehman accounts on Friday under a bankruptcy-style process to transfer assets from 639,000 Lehman customer accounts -- about 130,000 of which are owned by individual investors -- to Barclays accounts.
"The substance of this transaction is to continue a business for the benefit of the economy," Lehman lawyer Miller said in court.
The hearing drew more than 200 lawyers and observers, who spilled into overflow rooms on two floors of the U.S. Bankruptcy Court in Lower Manhattan.
In response to the extraordinary events of the week, the Bush administration announced Friday the biggest proposed government intervention in financial markets since the Great Depression. Some are calling it an "RTC-style bailout" in reference to the government-owned Resolution Trust Corp. that wound down the assets of Savings and Loan Associations, mostly in the 1980s.
"Somehow Lehman Brothers gets left on the sidelines," said Daniel Golden of Akin Gump Strauss Hauer & Feld LLP, who represents clients holding about $9 billion in bonds. "We believe this was a flawed sales process. It benefits Barclays and the federal government but not the creditors of this estate.
"The economic landscape seems to have changed over the last two days," he said. "Yet the debtors and the Fed seem determined that nothing get in the way of this transaction."
Had Lehman filed for Chapter 11 a week later than it had, its fate may have been different.
"This is a tragedy -- maybe we missed the RTC by a week," Miller said.
"That occurred to me, as well," the judge in the case, James Peck, said. "Lehman Brothers became a victim, in effect the only true icon to fall in the tsunami that has befallen the credit markets."
Rescue plan seeks $700B to buy bad mortgages
Saturday September 20, 10:38 am ET By Julie Hirschfeld Davis, Associated Press Writer
Bush rescue plan seeks $700B for to buy bad mortgages, would raise limit on national debt
WASHINGTON (AP) -- The Bush administration is asking Congress to let the government buy $700 billion in toxic mortgages in the largest financial bailout since the Great Depression, according to a draft of the plan obtained Saturday by The Associated Press.
The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance.
"We're going to work with Congress to get a bill done quickly," President Bush said at the White House. Without discussing details of the plan, he said, "This is a big package because it was a big problem."
The White House and congressional leaders hoped the developing legislation could pass as early as next week.
Administration officials and members of Congress were to negotiate throughout the weekend. The plan is designed to let faltering financial institutions unload their bad debt on the government, and in turn the taxpayer, in a bid to avoid dire economic consequences.
Bush said he worried the financial troubles "could ripple throughout" the economy and affect average citizens. "The risk of doing nothing far outweighs the risk of the package, and over time we're going to get a lot of the money back."
He added, "People are beginning to doubt our system, people were losing confidence and I understand it's important to have confidence in our financial system."
"In my judgment, based upon the advice of a lot of people who know how markets work, this problem wasn't going to be contained to just the financial community," the president said. He said he was concerned about "Main Street" and that what happens on "Wall Street" affects "Main Street."
Democrats are insisting the rescue include mortgage help to let struggling homeowners avoid foreclosures. They also are also considering attaching additional middle-class assistance to the legislation despite a request from Bush to avoid adding controversial items that could delay action. An expansion of jobless benefits was one possibility.
Asked about the chances of adding such items, Bush sidestepped the question, saying only that now was not the time for political posturing. "The cleaner the better," he said about legislation he hopes Congress sends back to him at the White House.
If passed by Congress, the plan would give the treasury secretary broad power to buy and sell the toxic mortgage-related assets without any additional involvement by lawmakers. The proposal, however, would require that the congressional committees with oversight on budget, tax and financial services issues be briefed within three months of the government's first use of the rescue power, and every six months after that.
In a briefing to lawmakers Friday, Paulson and Federal Reserve Chairman Ben Bernanke painted a grave picture of an economy on the edge of a major recession and telling them that action was urgent and imperative.
In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets -- such as loans that are delinquent but not in default -- and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the conference call.
"You give them good cash; they give you the worst of the worst," Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping it.
Paulson said the new troubled-asset relief program must be large enough to have the necessary impact while protecting taxpayers as much as possible.
"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said. "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."
Administration officials hoped the rescue plan could be finalized this weekend, to lend calm to Monday morning's market openings, said Keith Hennessey, the director of the president's economic council. The goal is to have something passed by Congress by the end of next week, when lawmakers recess for the elections.
Bush rescue plan seeks $700B for to buy bad mortgages, would raise limit on national debt
WASHINGTON (AP) -- The Bush administration is asking Congress to let the government buy $700 billion in toxic mortgages in the largest financial bailout since the Great Depression, according to a draft of the plan obtained Saturday by The Associated Press.
The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance.
"We're going to work with Congress to get a bill done quickly," President Bush said at the White House. Without discussing details of the plan, he said, "This is a big package because it was a big problem."
The White House and congressional leaders hoped the developing legislation could pass as early as next week.
Administration officials and members of Congress were to negotiate throughout the weekend. The plan is designed to let faltering financial institutions unload their bad debt on the government, and in turn the taxpayer, in a bid to avoid dire economic consequences.
Bush said he worried the financial troubles "could ripple throughout" the economy and affect average citizens. "The risk of doing nothing far outweighs the risk of the package, and over time we're going to get a lot of the money back."
He added, "People are beginning to doubt our system, people were losing confidence and I understand it's important to have confidence in our financial system."
"In my judgment, based upon the advice of a lot of people who know how markets work, this problem wasn't going to be contained to just the financial community," the president said. He said he was concerned about "Main Street" and that what happens on "Wall Street" affects "Main Street."
Democrats are insisting the rescue include mortgage help to let struggling homeowners avoid foreclosures. They also are also considering attaching additional middle-class assistance to the legislation despite a request from Bush to avoid adding controversial items that could delay action. An expansion of jobless benefits was one possibility.
Asked about the chances of adding such items, Bush sidestepped the question, saying only that now was not the time for political posturing. "The cleaner the better," he said about legislation he hopes Congress sends back to him at the White House.
If passed by Congress, the plan would give the treasury secretary broad power to buy and sell the toxic mortgage-related assets without any additional involvement by lawmakers. The proposal, however, would require that the congressional committees with oversight on budget, tax and financial services issues be briefed within three months of the government's first use of the rescue power, and every six months after that.
In a briefing to lawmakers Friday, Paulson and Federal Reserve Chairman Ben Bernanke painted a grave picture of an economy on the edge of a major recession and telling them that action was urgent and imperative.
In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets -- such as loans that are delinquent but not in default -- and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the conference call.
"You give them good cash; they give you the worst of the worst," Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping it.
Paulson said the new troubled-asset relief program must be large enough to have the necessary impact while protecting taxpayers as much as possible.
"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said. "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."
Administration officials hoped the rescue plan could be finalized this weekend, to lend calm to Monday morning's market openings, said Keith Hennessey, the director of the president's economic council. The goal is to have something passed by Congress by the end of next week, when lawmakers recess for the elections.
Wednesday, September 17, 2008
Worst Crisis Since '30s, With No End Yet in Sight
By JON HILSENRATH, SERENA NG and DAMIAN PALETTA
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The financial crisis that began 13 months ago has entered a new, far more serious phase.
Lingering hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated. New fault lines are emerging beyond the original problem -- troubled subprime mortgages -- in areas like credit-default swaps, the credit insurance contracts sold by American International Group Inc. and others. There's also a growing sense of wariness about the health of trading partners.
Getty Images
Traders on the floor of the New York Stock Exchange Wednesday. Expectations for a quick end to the crisis are fading fast.
The consequences for companies and chief executives who tarry -- hoping for better times in which to raise capital, sell assets or acknowledge losses -- are now clear and brutal, as falling share prices and fearful lenders send troubled companies into ever-deeper holes. This weekend, such a realization led John Thain to sell the century-old Merrill Lynch & Co. to Bank of America Corp. Each episode seems to bring government intervention that is more extensive and expensive than the previous one, and carries greater risk of unintended consequences.
Expectations for a quick end to the crisis are fading fast. "I think it's going to last a lot longer than perhaps we would have anticipated," Anne Mulcahy, chief executive of Xerox Corp., said Wednesday.
"This has been the worst financial crisis since the Great Depression. There is no question about it," said Mark Gertler, a New York University economist who worked with fellow academic Ben Bernanke, now the Federal Reserve chairman, to explain how financial turmoil can infect the overall economy. "But at the same time we have the policy mechanisms in place fighting it, which is something we didn't have during the Great Depression."
Spreading Disease
The U.S. financial system resembles a patient in intensive care. The body is trying to fight off a disease that is spreading, and as it does so, the body convulses, settles for a time and then convulses again. The illness seems to be overwhelming the self-healing tendencies of markets. The doctors in charge are resorting to ever-more invasive treatment, and are now experimenting with remedies that have never before been applied. Fed Chairman Bernanke and Treasury Secretary Henry Paulson, walking into a hastily arranged meeting with congressional leaders Tuesday night to brief them on the government's unprecedented rescue of AIG, looked like exhausted surgeons delivering grim news to the family.
In the wake of this past week's market meltdown, WSJ's economics editor David Wessel looks at the shakeup and sees one of two outcomes: the crisis as catharsis or a drawn-out mess.
Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can't pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.
At least three things need to happen to bring the deleveraging process to an end, and they're hard to do at once. Financial institutions and others need to fess up to their mistakes by selling or writing down the value of distressed assets they bought with borrowed money. They need to pay off debt. Finally, they need to rebuild their capital cushions, which have been eroded by losses on those distressed assets.
But many of the distressed assets are hard to value and there are few if any buyers. Deleveraging also feeds on itself in a way that can create a downward spiral: Trying to sell assets pushes down the assets' prices, which makes them harder to sell and leads firms to try to sell more assets. That, in turn, suppresses these firms' share prices and makes it harder for them to sell new shares to raise capital. Mr. Bernanke, as an academic, dubbed this self-feeding loop a "financial accelerator."
"Many of the CEO types weren't willing...to take these losses, and say, 'I accept the fact that I'm selling these way below fundamental value,'" said Anil Kashyap, a University of Chicago Business School economics professor. "The ones that had the biggest exposure, they've all died."
Deleveraging started with securities tied to subprime mortgages, where defaults started rising rapidly in 2006. But the deleveraging process has now spread well beyond, to commercial real estate and auto loans to the short-term commitments on which investment banks rely to fund themselves. In the first quarter, financial-sector borrowing slowed to a 5.1% growth rate, about half of the average from 2002 to 2007. Household borrowing has slowed even more, to a 3.5% pace.
Not Enough
Goldman Sachs Group Inc. economist Jan Hatzius estimates that in the past year, financial institutions around the world have already written down $408 billion worth of assets and raised $367 billion worth of capital.
But that doesn't appear to be enough. Every time financial firms and investors suggest that they've written assets down enough and raised enough new capital, a new wave of selling triggers a reevaluation, propelling the crisis into new territory. Residential mortgage losses alone could hit $636 billion by 2012, Goldman estimates, triggering widespread retrenchment in bank lending. That could shave 1.8 percentage points a year off economic growth in 2008 and 2009 -- the equivalent of $250 billion in lost goods and services each year.
"This is a deleveraging like nothing we've ever seen before," said Robert Glauber, now a professor of Harvard's government and law schools who came to Washington in 1989 to help organize the savings and loan cleanup of the early 1990s. "The S&L losses to the government were small compared to this."
Hedge funds could be among the next problem areas. Many rely on borrowed money to amplify their returns. With banks under pressure, many hedge funds are less able to borrow this money now, pressuring returns. Meanwhile, there are growing indications that fewer investors are shifting into hedge funds while others are pulling out. Fund investors are dealing with their own problems: Many have taken out loans to make their investments and are finding it more difficult now to borrow.
That all makes it likely that more hedge funds will shutter in the months ahead, forcing them to sell their investments, further weighing on the market.
Debt-driven financial traumas have a long history, from the Great Depression to the S&L crisis to the Asian financial crisis of the late 1990s. Neither economists nor policymakers have easy solutions. Cutting interest rates and writing stimulus checks to families can help -- and may have prevented or delayed a deep recession. But, at least in this instance, they don't suffice.
In such circumstances, governments almost invariably experiment with solutions with varying degrees of success. President Franklin Delano Roosevelt unleashed an alphabet soup of new agencies and a host of new regulations in the aftermath of the market crash of 1929. In the 1990s, Japan embarked on a decade of often-wasteful government spending to counter the aftereffects of a bursting bubble. President George H.W. Bush and Congress created the Resolution Trust Corp. to take and sell the assets of failed thrifts. Hong Kong's free-market government went on a massive stock-buying spree in 1998, buying up shares of every company listed in the benchmark Hang Seng index. It ended up packaging them into an exchange-traded fund and making money.
Taking Out the Playbook
Today, Mr. Bernanke is taking out his playbook, said NYU economist Mr. Gertler, "and rewriting it as we go."
Merrill Lynch & Co.'s emergency sale to Bank of America Corp. last weekend was an example of the perniciousness and unpredictability of deleveraging. In the past year, Merrill had hired a new chief executive, written off $41.4 billion in assets and raised $21 billion in equity capital.
But Merrill couldn't keep up. The more it raised, the more it was forced to write off. When Merrill CEO John Thain attended a meeting with the New York Fed and other Wall Street executives last week, he saw that Merrill was the next most vulnerable brokerage firm. "We watched Bear and Lehman. We knew we could be next," said one Merrill executive. Fearful that its lenders would shut the firm off, he sold to Bank of America.
This crisis is complicated by innovative financial instruments that Wall Street created and distributed. They're making it harder for officials and Wall Street executives to know where the next set of risks is hiding and also contributing to the crisis's spreading impact.
Swaps Game
The latest trouble spot is an area called credit-default swaps, which are private contracts that let firms trade bets on whether a borrower is going to default. When a default occurs, one party pays off the other. The value of the swaps rise and fall as the market reassesses the risk that a company won't be able to honor its obligations. Firms use these instruments both as insurance -- to hedge their exposures to risk -- and to wager on the health of other companies. There are now credit-default swaps on more than $62 trillion in debt, up from about $144 billion a decade ago.
One of the big new players in the swaps game was AIG, the world's largest insurer and a major seller of credit-default swaps to financial institutions and companies. When the credit markets were booming, many firms bought these instruments from AIG, believing the insurance giant's strong credit ratings and large balance sheet could provide a shield against bond and loan defaults. AIG believed the risk of default was low on many securities it insured.
As of June 30, an AIG unit had written credit-default swaps on more than $446 billion in credit assets, including mortgage securities, corporate loans and complex structured products. Last year, when rising subprime-mortgage delinquencies damaged the value of many securities AIG had insured, the firm was forced to book large write-downs on its derivative positions. That spooked investors, who reacted by dumping its shares, making it harder for AIG to raise the capital it increasingly needed.
More on the Crisis
Mounting Fears Shake World Markets
Morgan Stanley in Talks With Wachovia
Unheard Pleas, Lost Chances for AIG
Complete Coverage: Wall Street in Crisis
Credit default swaps "didn't cause the problem, but they certainly exacerbated the financial crisis," said Leslie Rahl, president of Capital Market Risk Advisors, a consulting firm in New York. The sheer volume of CDS contracts outstanding -- and the fact that they trade directly between institutions, without centralized clearing -- intertwined the fates of many large banks and brokerages.
Few financial crises have been sorted out in modern times without massive government intervention. Increasingly, officials are coming to the conclusion that even more might be needed. A big problem: The Fed can and has provided short-term money to sound, but struggling, institutions that are out of favor. It can, and has, reduced the interest rates it influences to attempt to reduce borrowing costs through the economy and encourage investment and spending.
But it is ill-equipped to provide the capital that financial institutions now desperately need to shore up their finances and expand lending.
Resolution Trust Scenario
In normal times, capital-starved companies usually can raise money on their own. In the current crisis, a number of big Wall Street firms, including Citigroup Inc., have turned to sovereign-wealth funds, the government-controlled pools of money.
But both on Wall Street and in Washington, there is increasing expectation that U.S. taxpayers will either take the bad assets off the hands of financial institutions so they can raise capital, or put taxpayer capital into the companies, as the Treasury has agreed to do with mortgage giants Fannie Mae and Freddie Mac.
One proposal was raised by Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee. Rep. Frank is looking at whether to create an analog to the Resolution Trust Corp., which took assets from failed banks and thrifts and found buyers over several years.
"When you have a big loss in the marketplace, there are only three people that can take the loss -- the bondholders, the shareholders and the government," said William Seidman, who led the RTC from 1989 to 1991. "That's the dance we're seeing right now. Are we going to shove this loss into the hands of the taxpayers?"
The RTC seemed controversial and ambitious at the time. Any version today would be even more complex. The RTC dispensed mostly of commercial real estate. Today's troubled assets are complex debt securities -- many of which include pieces of other instruments, which in turn include pieces of others, many steps removed from the actual mortgages or consumer loans on which they are based. Unraveling these strands will be tedious and getting at the underlying collateral, difficult.
In the early stages of this crisis, regulators saw that their rules didn't fit the rapidly changing financial system they were asked to oversee. Investment banks, at the core of the crisis, weren't as closely monitored by the Securities and Exchange Commission as commercial banks were by their regulators.
The government has a system to close failed banks, created after the Great Depression in part to avoid sudden runs by depositors. Now, runs happen in spheres regulators may not fully understand, such as the repurchase agreement, or repo, market, in which investment banks fund their day-to-day operations. And regulators have no process for handling the failure of an investment bank like Lehman Brothers Holdings Inc. Insurers like AIG aren't even federally regulated.
Regulators have all but promised that more banks will fail in the coming months. The Federal Deposit Insurance Corp. is drawing up a plan to raise the premiums it charges banks so that it can rebuild the fund it uses to back deposits. Examiners are tightening their leash on banks across the country.
Pleasant Mystery
One pleasant mystery is why the crisis hasn't hit the economy harder -- at least so far. "This financial crisis hasn't yet translated into fewer...companies starting up, less research and development, less marketing," Ivan Seidenberg, chief executive of Verizon Communications, said Wednesday. "We haven't seen that yet. I'm sure every company is keeping their eyes on it."
At 6.1%, the unemployment rate remains well below the peak of 7.8% in 1992, amid the S&L crisis.
In part, that's because government has reacted aggressively. The Fed's classic mistake that led to the Great Depression was that it tightened monetary policy when it should have eased. Mr. Bernanke didn't repeat that error. And Congress moved more swiftly to approve fiscal stimulus than most Washington veterans thought possible.
In part, the broader economy has held mostly steady because exports have been so strong at just the right moment, a reminder of the global economy's importance to the U.S. And in part, it's because the U.S. economy is demonstrating impressive resilience, as information technology allows executives to react more quickly to emerging problems and -- to the discomfort of workers -- companies are quicker to adjust wages, hiring and work hours when the economy softens.
But the risk remains that Wall Street's woes will spread to Main Street, as credit tightens for consumers and business. Already, U.S. auto makers have been forced to tighten the terms on their leasing programs, or abandon writing leases themselves altogether, because of problems in their finance units. Goldman Sachs economists' optimistic scenario is a couple years of mild recession or painfully slow economy growth.
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more in Markets Main »
The financial crisis that began 13 months ago has entered a new, far more serious phase.
Lingering hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated. New fault lines are emerging beyond the original problem -- troubled subprime mortgages -- in areas like credit-default swaps, the credit insurance contracts sold by American International Group Inc. and others. There's also a growing sense of wariness about the health of trading partners.
Getty Images
Traders on the floor of the New York Stock Exchange Wednesday. Expectations for a quick end to the crisis are fading fast.
The consequences for companies and chief executives who tarry -- hoping for better times in which to raise capital, sell assets or acknowledge losses -- are now clear and brutal, as falling share prices and fearful lenders send troubled companies into ever-deeper holes. This weekend, such a realization led John Thain to sell the century-old Merrill Lynch & Co. to Bank of America Corp. Each episode seems to bring government intervention that is more extensive and expensive than the previous one, and carries greater risk of unintended consequences.
Expectations for a quick end to the crisis are fading fast. "I think it's going to last a lot longer than perhaps we would have anticipated," Anne Mulcahy, chief executive of Xerox Corp., said Wednesday.
"This has been the worst financial crisis since the Great Depression. There is no question about it," said Mark Gertler, a New York University economist who worked with fellow academic Ben Bernanke, now the Federal Reserve chairman, to explain how financial turmoil can infect the overall economy. "But at the same time we have the policy mechanisms in place fighting it, which is something we didn't have during the Great Depression."
Spreading Disease
The U.S. financial system resembles a patient in intensive care. The body is trying to fight off a disease that is spreading, and as it does so, the body convulses, settles for a time and then convulses again. The illness seems to be overwhelming the self-healing tendencies of markets. The doctors in charge are resorting to ever-more invasive treatment, and are now experimenting with remedies that have never before been applied. Fed Chairman Bernanke and Treasury Secretary Henry Paulson, walking into a hastily arranged meeting with congressional leaders Tuesday night to brief them on the government's unprecedented rescue of AIG, looked like exhausted surgeons delivering grim news to the family.
In the wake of this past week's market meltdown, WSJ's economics editor David Wessel looks at the shakeup and sees one of two outcomes: the crisis as catharsis or a drawn-out mess.
Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can't pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.
At least three things need to happen to bring the deleveraging process to an end, and they're hard to do at once. Financial institutions and others need to fess up to their mistakes by selling or writing down the value of distressed assets they bought with borrowed money. They need to pay off debt. Finally, they need to rebuild their capital cushions, which have been eroded by losses on those distressed assets.
But many of the distressed assets are hard to value and there are few if any buyers. Deleveraging also feeds on itself in a way that can create a downward spiral: Trying to sell assets pushes down the assets' prices, which makes them harder to sell and leads firms to try to sell more assets. That, in turn, suppresses these firms' share prices and makes it harder for them to sell new shares to raise capital. Mr. Bernanke, as an academic, dubbed this self-feeding loop a "financial accelerator."
"Many of the CEO types weren't willing...to take these losses, and say, 'I accept the fact that I'm selling these way below fundamental value,'" said Anil Kashyap, a University of Chicago Business School economics professor. "The ones that had the biggest exposure, they've all died."
Deleveraging started with securities tied to subprime mortgages, where defaults started rising rapidly in 2006. But the deleveraging process has now spread well beyond, to commercial real estate and auto loans to the short-term commitments on which investment banks rely to fund themselves. In the first quarter, financial-sector borrowing slowed to a 5.1% growth rate, about half of the average from 2002 to 2007. Household borrowing has slowed even more, to a 3.5% pace.
Not Enough
Goldman Sachs Group Inc. economist Jan Hatzius estimates that in the past year, financial institutions around the world have already written down $408 billion worth of assets and raised $367 billion worth of capital.
But that doesn't appear to be enough. Every time financial firms and investors suggest that they've written assets down enough and raised enough new capital, a new wave of selling triggers a reevaluation, propelling the crisis into new territory. Residential mortgage losses alone could hit $636 billion by 2012, Goldman estimates, triggering widespread retrenchment in bank lending. That could shave 1.8 percentage points a year off economic growth in 2008 and 2009 -- the equivalent of $250 billion in lost goods and services each year.
"This is a deleveraging like nothing we've ever seen before," said Robert Glauber, now a professor of Harvard's government and law schools who came to Washington in 1989 to help organize the savings and loan cleanup of the early 1990s. "The S&L losses to the government were small compared to this."
Hedge funds could be among the next problem areas. Many rely on borrowed money to amplify their returns. With banks under pressure, many hedge funds are less able to borrow this money now, pressuring returns. Meanwhile, there are growing indications that fewer investors are shifting into hedge funds while others are pulling out. Fund investors are dealing with their own problems: Many have taken out loans to make their investments and are finding it more difficult now to borrow.
That all makes it likely that more hedge funds will shutter in the months ahead, forcing them to sell their investments, further weighing on the market.
Debt-driven financial traumas have a long history, from the Great Depression to the S&L crisis to the Asian financial crisis of the late 1990s. Neither economists nor policymakers have easy solutions. Cutting interest rates and writing stimulus checks to families can help -- and may have prevented or delayed a deep recession. But, at least in this instance, they don't suffice.
In such circumstances, governments almost invariably experiment with solutions with varying degrees of success. President Franklin Delano Roosevelt unleashed an alphabet soup of new agencies and a host of new regulations in the aftermath of the market crash of 1929. In the 1990s, Japan embarked on a decade of often-wasteful government spending to counter the aftereffects of a bursting bubble. President George H.W. Bush and Congress created the Resolution Trust Corp. to take and sell the assets of failed thrifts. Hong Kong's free-market government went on a massive stock-buying spree in 1998, buying up shares of every company listed in the benchmark Hang Seng index. It ended up packaging them into an exchange-traded fund and making money.
Taking Out the Playbook
Today, Mr. Bernanke is taking out his playbook, said NYU economist Mr. Gertler, "and rewriting it as we go."
Merrill Lynch & Co.'s emergency sale to Bank of America Corp. last weekend was an example of the perniciousness and unpredictability of deleveraging. In the past year, Merrill had hired a new chief executive, written off $41.4 billion in assets and raised $21 billion in equity capital.
But Merrill couldn't keep up. The more it raised, the more it was forced to write off. When Merrill CEO John Thain attended a meeting with the New York Fed and other Wall Street executives last week, he saw that Merrill was the next most vulnerable brokerage firm. "We watched Bear and Lehman. We knew we could be next," said one Merrill executive. Fearful that its lenders would shut the firm off, he sold to Bank of America.
This crisis is complicated by innovative financial instruments that Wall Street created and distributed. They're making it harder for officials and Wall Street executives to know where the next set of risks is hiding and also contributing to the crisis's spreading impact.
Swaps Game
The latest trouble spot is an area called credit-default swaps, which are private contracts that let firms trade bets on whether a borrower is going to default. When a default occurs, one party pays off the other. The value of the swaps rise and fall as the market reassesses the risk that a company won't be able to honor its obligations. Firms use these instruments both as insurance -- to hedge their exposures to risk -- and to wager on the health of other companies. There are now credit-default swaps on more than $62 trillion in debt, up from about $144 billion a decade ago.
One of the big new players in the swaps game was AIG, the world's largest insurer and a major seller of credit-default swaps to financial institutions and companies. When the credit markets were booming, many firms bought these instruments from AIG, believing the insurance giant's strong credit ratings and large balance sheet could provide a shield against bond and loan defaults. AIG believed the risk of default was low on many securities it insured.
As of June 30, an AIG unit had written credit-default swaps on more than $446 billion in credit assets, including mortgage securities, corporate loans and complex structured products. Last year, when rising subprime-mortgage delinquencies damaged the value of many securities AIG had insured, the firm was forced to book large write-downs on its derivative positions. That spooked investors, who reacted by dumping its shares, making it harder for AIG to raise the capital it increasingly needed.
More on the Crisis
Mounting Fears Shake World Markets
Morgan Stanley in Talks With Wachovia
Unheard Pleas, Lost Chances for AIG
Complete Coverage: Wall Street in Crisis
Credit default swaps "didn't cause the problem, but they certainly exacerbated the financial crisis," said Leslie Rahl, president of Capital Market Risk Advisors, a consulting firm in New York. The sheer volume of CDS contracts outstanding -- and the fact that they trade directly between institutions, without centralized clearing -- intertwined the fates of many large banks and brokerages.
Few financial crises have been sorted out in modern times without massive government intervention. Increasingly, officials are coming to the conclusion that even more might be needed. A big problem: The Fed can and has provided short-term money to sound, but struggling, institutions that are out of favor. It can, and has, reduced the interest rates it influences to attempt to reduce borrowing costs through the economy and encourage investment and spending.
But it is ill-equipped to provide the capital that financial institutions now desperately need to shore up their finances and expand lending.
Resolution Trust Scenario
In normal times, capital-starved companies usually can raise money on their own. In the current crisis, a number of big Wall Street firms, including Citigroup Inc., have turned to sovereign-wealth funds, the government-controlled pools of money.
But both on Wall Street and in Washington, there is increasing expectation that U.S. taxpayers will either take the bad assets off the hands of financial institutions so they can raise capital, or put taxpayer capital into the companies, as the Treasury has agreed to do with mortgage giants Fannie Mae and Freddie Mac.
One proposal was raised by Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee. Rep. Frank is looking at whether to create an analog to the Resolution Trust Corp., which took assets from failed banks and thrifts and found buyers over several years.
"When you have a big loss in the marketplace, there are only three people that can take the loss -- the bondholders, the shareholders and the government," said William Seidman, who led the RTC from 1989 to 1991. "That's the dance we're seeing right now. Are we going to shove this loss into the hands of the taxpayers?"
The RTC seemed controversial and ambitious at the time. Any version today would be even more complex. The RTC dispensed mostly of commercial real estate. Today's troubled assets are complex debt securities -- many of which include pieces of other instruments, which in turn include pieces of others, many steps removed from the actual mortgages or consumer loans on which they are based. Unraveling these strands will be tedious and getting at the underlying collateral, difficult.
In the early stages of this crisis, regulators saw that their rules didn't fit the rapidly changing financial system they were asked to oversee. Investment banks, at the core of the crisis, weren't as closely monitored by the Securities and Exchange Commission as commercial banks were by their regulators.
The government has a system to close failed banks, created after the Great Depression in part to avoid sudden runs by depositors. Now, runs happen in spheres regulators may not fully understand, such as the repurchase agreement, or repo, market, in which investment banks fund their day-to-day operations. And regulators have no process for handling the failure of an investment bank like Lehman Brothers Holdings Inc. Insurers like AIG aren't even federally regulated.
Regulators have all but promised that more banks will fail in the coming months. The Federal Deposit Insurance Corp. is drawing up a plan to raise the premiums it charges banks so that it can rebuild the fund it uses to back deposits. Examiners are tightening their leash on banks across the country.
Pleasant Mystery
One pleasant mystery is why the crisis hasn't hit the economy harder -- at least so far. "This financial crisis hasn't yet translated into fewer...companies starting up, less research and development, less marketing," Ivan Seidenberg, chief executive of Verizon Communications, said Wednesday. "We haven't seen that yet. I'm sure every company is keeping their eyes on it."
At 6.1%, the unemployment rate remains well below the peak of 7.8% in 1992, amid the S&L crisis.
In part, that's because government has reacted aggressively. The Fed's classic mistake that led to the Great Depression was that it tightened monetary policy when it should have eased. Mr. Bernanke didn't repeat that error. And Congress moved more swiftly to approve fiscal stimulus than most Washington veterans thought possible.
In part, the broader economy has held mostly steady because exports have been so strong at just the right moment, a reminder of the global economy's importance to the U.S. And in part, it's because the U.S. economy is demonstrating impressive resilience, as information technology allows executives to react more quickly to emerging problems and -- to the discomfort of workers -- companies are quicker to adjust wages, hiring and work hours when the economy softens.
But the risk remains that Wall Street's woes will spread to Main Street, as credit tightens for consumers and business. Already, U.S. auto makers have been forced to tighten the terms on their leasing programs, or abandon writing leases themselves altogether, because of problems in their finance units. Goldman Sachs economists' optimistic scenario is a couple years of mild recession or painfully slow economy growth.
Asian markets tumble as financial fears deepen
By JEREMIAH MARQUEZ, AP Business Writer1 hour, 32 minutes ago
Asian stocks tumbled Thursday, tracking declines on Wall Street as investors feared more companies could succumb to the global financial crisis that forced the U.S. to bail out troubled insurer American International Group Inc.
Every regional benchmark fell deeply in the red.
Hong Kong's Hang Seng Index led the region's losses, tanking 1,272.86 points, or 7.22 percent, to 16,364.33 — its lowest level in over two years.
In Japan, the Nikkei 225 stock index was down 445.67 points, or 3.79 percent, at 11,304.12. Australia's S&P/ASX200 index fell more than 3.5 percent, South Korea's Kospi lost 3.6 percent and Shanghai's index fell 5.8 percent.
The losses tracked U.S. markets, where the Dow Jones industrial average fell about 450 points, or 4.06 percent, to 10,609.66.
Investors were unsettled by the Federal Reserve's $85 billion loan to AIG, the huge U.S. insurer that lost billions in the risky business of insuring against bond defaults. It was the latest financial giant to fall in a historic financial crisis on Wall Street that's already claimed investment banks Lehman Brothers and Merrill Lynch.
"It's a complete collapse of confidence," said Francis Lun, general manager of Fulbright Securities Ltd in Hong Kong. "The financial crisis in the U.S. is hitting everyone, everyone is running for cover. If the largest insurance company can fail, than no one is safe."
As equities markets staggered, investors fled to gold, seen as a safe haven in times of trouble. Gold for December delivery rose as much as $90.40, or 11.6 percent, to $870.90 an ounce in after-hours trading on the New York Mercantile Exchange after jumping $70 to settle at $850.50 in the regular session.
Oil rose above $97 in Asian trade Thursday, extending its big gains overnight. The dollar was little changed at 104.32 yen and the euro rose to $1.4345.
Financial stocks across Asian went into a tailspin.
Japan's three megabanks fell hard: Mizuho Financial Group, Inc. sank 7.2 percent, Mitsubishi UFJ Financial Group, Inc. shed 4.6 percent, and Sumitomo Mitsui Financial Group retreated 7.4 percent.
Leading China lender Industrial & Commercial Bank of China Ltd, or ICBC, fell over 5 percent in Hong Kong.
Macquarie Group Ltd., Australia's biggest investment bank and securities firm, took an 18 percent nosedive.
Richard herring, the director of trading at Burrell Stockbroking, said Australian investors were nervous about AIG bailout.
"It has actually opened up a whole lot of other questions for investors to answer and that is: AIG is on the rack, what else is potentially out there that could go under?" Herring said.
Major exporters including auto makers and electronics firms also wilted, hurt by a sagging dollar and slowing overseas markets.
In Japan, Nintendo Co., maker of the popular Wii game console, tumbled 4.4 percent after earlier hitting a near year-low.
Asian stocks tumbled Thursday, tracking declines on Wall Street as investors feared more companies could succumb to the global financial crisis that forced the U.S. to bail out troubled insurer American International Group Inc.
Every regional benchmark fell deeply in the red.
Hong Kong's Hang Seng Index led the region's losses, tanking 1,272.86 points, or 7.22 percent, to 16,364.33 — its lowest level in over two years.
In Japan, the Nikkei 225 stock index was down 445.67 points, or 3.79 percent, at 11,304.12. Australia's S&P/ASX200 index fell more than 3.5 percent, South Korea's Kospi lost 3.6 percent and Shanghai's index fell 5.8 percent.
The losses tracked U.S. markets, where the Dow Jones industrial average fell about 450 points, or 4.06 percent, to 10,609.66.
Investors were unsettled by the Federal Reserve's $85 billion loan to AIG, the huge U.S. insurer that lost billions in the risky business of insuring against bond defaults. It was the latest financial giant to fall in a historic financial crisis on Wall Street that's already claimed investment banks Lehman Brothers and Merrill Lynch.
"It's a complete collapse of confidence," said Francis Lun, general manager of Fulbright Securities Ltd in Hong Kong. "The financial crisis in the U.S. is hitting everyone, everyone is running for cover. If the largest insurance company can fail, than no one is safe."
As equities markets staggered, investors fled to gold, seen as a safe haven in times of trouble. Gold for December delivery rose as much as $90.40, or 11.6 percent, to $870.90 an ounce in after-hours trading on the New York Mercantile Exchange after jumping $70 to settle at $850.50 in the regular session.
Oil rose above $97 in Asian trade Thursday, extending its big gains overnight. The dollar was little changed at 104.32 yen and the euro rose to $1.4345.
Financial stocks across Asian went into a tailspin.
Japan's three megabanks fell hard: Mizuho Financial Group, Inc. sank 7.2 percent, Mitsubishi UFJ Financial Group, Inc. shed 4.6 percent, and Sumitomo Mitsui Financial Group retreated 7.4 percent.
Leading China lender Industrial & Commercial Bank of China Ltd, or ICBC, fell over 5 percent in Hong Kong.
Macquarie Group Ltd., Australia's biggest investment bank and securities firm, took an 18 percent nosedive.
Richard herring, the director of trading at Burrell Stockbroking, said Australian investors were nervous about AIG bailout.
"It has actually opened up a whole lot of other questions for investors to answer and that is: AIG is on the rack, what else is potentially out there that could go under?" Herring said.
Major exporters including auto makers and electronics firms also wilted, hurt by a sagging dollar and slowing overseas markets.
In Japan, Nintendo Co., maker of the popular Wii game console, tumbled 4.4 percent after earlier hitting a near year-low.
Another nightmare on Wall Street: Dow down 450
Thursday September 18, 12:37 am ET By Ellen Simon, AP Business Writer
Stock market takes another dive as investors digest government rescue of giant insurer AIG
NEW YORK (AP) -- The stock market took another nosedive Wednesday as the American banking system appeared even shakier and investors worried that the financial crisis is spinning so far out of control that even government rescues can't stop it.
The Dow Jones industrial average, which only two days earlier had suffered its steepest drop since the days after the Sept. 11 attacks, lost another 450 points. About $700 billion in investments vanished.
One day after the Federal Reserve stepped in with an emergency loan to keep American International Group Inc., one of the world's largest insurers, from going under, Wall Street wondered which companies might be the next to falter.
A major investor in ailing Washington Mutual Inc. removed a potential obstacle to a sale of the bank, and stock in two investment banks, Morgan Stanley and Goldman Sachs, was pummeled.
It was the fourth consecutive day of extraordinary turmoil for the American financial system, beginning with news on Sunday that another venerable investment house, Lehman Brothers, would be forced to file for bankruptcy.
The 4 percent drop Wednesday in the Dow reflected the stock market's first chance to digest the Fed's decision to rescue AIG with an $85 billion taxpayer loan that effectively gives it a majority stake in the company. AIG is important because it has essentially become a primary source of insurance for the entire financial industry.
As the stock market staggered, the price of gold, which rises in times of panic, spiked as much as $90.40 an ounce. Bonds, a traditional safe haven for investors, also climbed.
"The economy is not short of money. It is short of confidence," said Sung Won Sohn, an economics professor at California State University.
The financial stocks in the Standard & Poor's 500 dropped even more, falling 10 percent, and insurance that backs corporate debt soared for the last two surviving independent U.S. investment banks, Morgan Stanley and Goldman Sachs.
"It seems as though banks are hoarding cash, no matter what rate they could be lending it at," said David Rosenberg, North American economist at Merrill Lynch.
Markets around the world also tumbled, with stocks dropping from Hong Kong to London. Brazil's benchmark index saw the largest drop, losing nearly 7 percent in a day.
Worse, the short-term credit markets remained frozen, with overnight interest rates soaring for loans between banks and for overnight loans to businesses. Long-term loans, however, didn't rise as much.
"The worry on short-term loans is you're not sure who the ultimate borrower is," said Brian Bethune, chief U.S. economist at Global Insight Inc.
And in case anyone needed additional symbolism, a glass panel near the top of a Bank of America skyscraper in Midtown Manhattan fell more than 50 stories onto the street below and shattered. No injuries were reported.
In the United States, the faltering economy and banking system have begun to dominate conversations at dinner tables, bars and online, not to mention seizing the campaign trail.
One blogger, Michele Catalano of Long Island, posted this on Wednesday: "Dreamed about AIG and the stock market, woke up with the urge to stock up on canned goods and shotguns."
Mortgage rates, which had fallen after the government's takeover of Fannie Mae and Freddie Mac, rose again, removing a glimmer of hope that the housing crisis, the kindling for the broader financial meltdown, was hitting bottom.
And new statistics showed that construction of new homes and apartments fell a surprising 6.2 percent in August to the weakest pace in 17 years.
The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs.
Treasury officials said the action did not mean that the Fed was running short of cash, but simply was a way for the government to better manage its financing needs.
Separately, the Securities and Exchange Commission tightened rules on short selling, the practice of betting that a stock will fall.
A $62 billion money market fund -- Primary Fund from Reserve -- on Tuesday saw its holdings fall below its total deposits, a condition known as "breaking the buck" that hasn't happened to a money market fund since 1994, Rosenberg said. Money market funds are supposed to be conservatively invested and almost as safe as cash.
Democratic presidential nominee Barack Obama appeared Wednesday in a two-minute commercial to outline his economic plans and caution it won't be easy to fix the nation's worsening financial problems.
"The truth is that while you've been living up to your responsibilities, Washington has not," he said.
Republican John McCain's running mate, Alaska Gov. Sarah Palin, said of the AIG move: "It's understandable but very, very disappointing that taxpayers are called upon for another one."
The Dow fell 449.36 to 10,609.66, finishing near its lowest point of the trading day. The index is down more than 7 percent just this week and more than 25 percent since its record close less than a year ago, on Oct. 9, 2007.
Stock in Washington Mutual fell 13 percent, dropping 31 cents to $2.01 amid reports that the government was trying to find a buyer for the bank, which has been battered by bad home loans. It lost $3.3 billion in the second quarter.
Many economists worried about the unintended consequences of the Fed's actions.
"Every time that umbrella widens, it gets heavier and heavier for those holding it up -- which is the taxpayer," said Bernard Baumohl, chief economist at the Economic Outlook Group in Princeton, N.J.
"With most Americans now preoccupied about their own future job security, the one thing they do not want to hear is how they will end up paying the bill for poorly managed companies," he said.
Stock market takes another dive as investors digest government rescue of giant insurer AIG
NEW YORK (AP) -- The stock market took another nosedive Wednesday as the American banking system appeared even shakier and investors worried that the financial crisis is spinning so far out of control that even government rescues can't stop it.
The Dow Jones industrial average, which only two days earlier had suffered its steepest drop since the days after the Sept. 11 attacks, lost another 450 points. About $700 billion in investments vanished.
One day after the Federal Reserve stepped in with an emergency loan to keep American International Group Inc., one of the world's largest insurers, from going under, Wall Street wondered which companies might be the next to falter.
A major investor in ailing Washington Mutual Inc. removed a potential obstacle to a sale of the bank, and stock in two investment banks, Morgan Stanley and Goldman Sachs, was pummeled.
It was the fourth consecutive day of extraordinary turmoil for the American financial system, beginning with news on Sunday that another venerable investment house, Lehman Brothers, would be forced to file for bankruptcy.
The 4 percent drop Wednesday in the Dow reflected the stock market's first chance to digest the Fed's decision to rescue AIG with an $85 billion taxpayer loan that effectively gives it a majority stake in the company. AIG is important because it has essentially become a primary source of insurance for the entire financial industry.
As the stock market staggered, the price of gold, which rises in times of panic, spiked as much as $90.40 an ounce. Bonds, a traditional safe haven for investors, also climbed.
"The economy is not short of money. It is short of confidence," said Sung Won Sohn, an economics professor at California State University.
The financial stocks in the Standard & Poor's 500 dropped even more, falling 10 percent, and insurance that backs corporate debt soared for the last two surviving independent U.S. investment banks, Morgan Stanley and Goldman Sachs.
"It seems as though banks are hoarding cash, no matter what rate they could be lending it at," said David Rosenberg, North American economist at Merrill Lynch.
Markets around the world also tumbled, with stocks dropping from Hong Kong to London. Brazil's benchmark index saw the largest drop, losing nearly 7 percent in a day.
Worse, the short-term credit markets remained frozen, with overnight interest rates soaring for loans between banks and for overnight loans to businesses. Long-term loans, however, didn't rise as much.
"The worry on short-term loans is you're not sure who the ultimate borrower is," said Brian Bethune, chief U.S. economist at Global Insight Inc.
And in case anyone needed additional symbolism, a glass panel near the top of a Bank of America skyscraper in Midtown Manhattan fell more than 50 stories onto the street below and shattered. No injuries were reported.
In the United States, the faltering economy and banking system have begun to dominate conversations at dinner tables, bars and online, not to mention seizing the campaign trail.
One blogger, Michele Catalano of Long Island, posted this on Wednesday: "Dreamed about AIG and the stock market, woke up with the urge to stock up on canned goods and shotguns."
Mortgage rates, which had fallen after the government's takeover of Fannie Mae and Freddie Mac, rose again, removing a glimmer of hope that the housing crisis, the kindling for the broader financial meltdown, was hitting bottom.
And new statistics showed that construction of new homes and apartments fell a surprising 6.2 percent in August to the weakest pace in 17 years.
The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs.
Treasury officials said the action did not mean that the Fed was running short of cash, but simply was a way for the government to better manage its financing needs.
Separately, the Securities and Exchange Commission tightened rules on short selling, the practice of betting that a stock will fall.
A $62 billion money market fund -- Primary Fund from Reserve -- on Tuesday saw its holdings fall below its total deposits, a condition known as "breaking the buck" that hasn't happened to a money market fund since 1994, Rosenberg said. Money market funds are supposed to be conservatively invested and almost as safe as cash.
Democratic presidential nominee Barack Obama appeared Wednesday in a two-minute commercial to outline his economic plans and caution it won't be easy to fix the nation's worsening financial problems.
"The truth is that while you've been living up to your responsibilities, Washington has not," he said.
Republican John McCain's running mate, Alaska Gov. Sarah Palin, said of the AIG move: "It's understandable but very, very disappointing that taxpayers are called upon for another one."
The Dow fell 449.36 to 10,609.66, finishing near its lowest point of the trading day. The index is down more than 7 percent just this week and more than 25 percent since its record close less than a year ago, on Oct. 9, 2007.
Stock in Washington Mutual fell 13 percent, dropping 31 cents to $2.01 amid reports that the government was trying to find a buyer for the bank, which has been battered by bad home loans. It lost $3.3 billion in the second quarter.
Many economists worried about the unintended consequences of the Fed's actions.
"Every time that umbrella widens, it gets heavier and heavier for those holding it up -- which is the taxpayer," said Bernard Baumohl, chief economist at the Economic Outlook Group in Princeton, N.J.
"With most Americans now preoccupied about their own future job security, the one thing they do not want to hear is how they will end up paying the bill for poorly managed companies," he said.
Stocks sink in early trading after AIG bailout
Wednesday September 17, 9:44 am ET By Madlen Read, AP Business Writer
Wall Street tumbles again after government bails out AIG, Barclays buys Lehman businesses
NEW YORK (AP) -- Stocks skidded again Wednesday, with anxieties about the financial system still running high even after the government bailed out the insurer American International Group Inc. The Dow Jones industrial average dropped about 200 points.
The Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a nearly 80 percent stake in the company. Wall Street had feared that the insurer, which has lost billions in the risky business of insuring against bond defaults, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy.
Lehman, after filing for bankruptcy protection on Monday, sold its North American investment banking and trading operations to Barclays, Britain's third-largest bank, on Tuesday for the bargain price of $250 million.
The moves by the Fed and Barclays lift some of the uncertainty surrounding two of the most precarious pillars of the U.S. financial system, but investors' worries are far from erased.
The two independent Wall Street investment banks left standing -- Goldman Sachs Group Inc. and Morgan Stanley -- remain under scrutiny. Morgan Stanley revealed its quarterly earnings early late Tuesday, posting a better-than-expected 7 percent slide in fiscal third-quarter profit and insisting that it is surviving the credit crisis that has ravaged many of its peers.
Over the weekend, Merrill Lynch, the world's largest brokerage, sold itself in a last-ditch effort to avoid failure to Bank of America Corp.
Furthermore, the troubles in the financial sector could exacerbate the problems facing the weak U.S. economy. The Commerce Department reported Wednesday that new home construction fell by 6.2 percent in August to 895,000 units, the slowest building pace since January 1991.
Slumping demand for houses, sinking home prices and mortgage defaults have been the catalysts behind Wall Street's turmoil -- and the risky mortgage-backed assets held by the nation's banks are not apt to regain in value until the housing market turns around.
A day after Wall Street regained some of Monday's nosedive, the Dow fell 200.54, or 1.81 percent, to 10,858.48 in early trading.
Broader stock indicators also tumbled. The Standard & Poor's 500 index fell 21.38, or 1.76 percent, to 1,192.22. The Nasdaq composite index fell 44.21, or 1.76 percent, to 1,192.22.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Wall Street tumbles again after government bails out AIG, Barclays buys Lehman businesses
NEW YORK (AP) -- Stocks skidded again Wednesday, with anxieties about the financial system still running high even after the government bailed out the insurer American International Group Inc. The Dow Jones industrial average dropped about 200 points.
The Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a nearly 80 percent stake in the company. Wall Street had feared that the insurer, which has lost billions in the risky business of insuring against bond defaults, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy.
Lehman, after filing for bankruptcy protection on Monday, sold its North American investment banking and trading operations to Barclays, Britain's third-largest bank, on Tuesday for the bargain price of $250 million.
The moves by the Fed and Barclays lift some of the uncertainty surrounding two of the most precarious pillars of the U.S. financial system, but investors' worries are far from erased.
The two independent Wall Street investment banks left standing -- Goldman Sachs Group Inc. and Morgan Stanley -- remain under scrutiny. Morgan Stanley revealed its quarterly earnings early late Tuesday, posting a better-than-expected 7 percent slide in fiscal third-quarter profit and insisting that it is surviving the credit crisis that has ravaged many of its peers.
Over the weekend, Merrill Lynch, the world's largest brokerage, sold itself in a last-ditch effort to avoid failure to Bank of America Corp.
Furthermore, the troubles in the financial sector could exacerbate the problems facing the weak U.S. economy. The Commerce Department reported Wednesday that new home construction fell by 6.2 percent in August to 895,000 units, the slowest building pace since January 1991.
Slumping demand for houses, sinking home prices and mortgage defaults have been the catalysts behind Wall Street's turmoil -- and the risky mortgage-backed assets held by the nation's banks are not apt to regain in value until the housing market turns around.
A day after Wall Street regained some of Monday's nosedive, the Dow fell 200.54, or 1.81 percent, to 10,858.48 in early trading.
Broader stock indicators also tumbled. The Standard & Poor's 500 index fell 21.38, or 1.76 percent, to 1,192.22. The Nasdaq composite index fell 44.21, or 1.76 percent, to 1,192.22.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Lehman unloads its banking divisions to Barclays
Wednesday September 17, 8:12 am ET By Joe Bel Bruno and Stephen Bernard, AP Business Writers
Barclays gets Lehman's North American banking and capital markets units for a Wall Street song
NEW YORK (AP) -- Lehman Brothers, which a year ago had a market capitalization of more than $33 billion, is now unloading its once-prized businesses for what passes as pocket change on Wall Street.
Barclays PLC, the third-largest British bank, took advantage of Lehman Brothers Holdings Inc.'s bankruptcy reorganization Tuesday to reach a deal for Lehman's North American investment banking and trading operations for just $250 million.
Barclays also picked up Lehman's New York headquarters and two data centers in New Jersey for $1.5 billion.
It marks a major coup for the U.K. bank, which agreed to buy the assets just days after walking away from a deal to purchase all of Lehman.
The U.S. investment bank filed for bankruptcy protection on Monday after it was unable to find financing or fresh capital to shore up its balance sheet amid a continued downturn in the credit markets.
The deals require approval from the bankruptcy court.
Meanwhile, Lehman executives continue to negotiate a potential sale of its prized investment management division, which includes money manager Neuberger Berman. The division was once valued by as much as $10 billion by Wall Street analysts, but now could fetch much less considering Lehman's bankruptcy proceedings.
A person familiar with the negotiations, who spoke on the condition of anonymity because the talks are ongoing, said Lehman was focusing on trying to sell the business to private-equity firms. The sale is expected to happen in a matter of days, the person said.
Bain Capital and Hellman & Friedman are the two top private-equity shops bidding on the investment management division, the person said, but Kohlberg Kravis Roberts & Co. is still in the running.
Barclays said it will acquire Lehman's North American banking operations, which include fixed income and equities sales, trading and research and investment banking business. The deal throws a lifeline to about 10,000 employees working in the divisions.
Barclays and Lehman reached the agreement hours after Lehman's first bankruptcy hearing in a crowded courtroom at the U.S. bankruptcy court in Manhattan, just steps away from Wall Street's iconic bull statue.
JPMorgan advanced Lehman $87 billion when the market opened Monday, acting in part on a request by the Federal Reserve Bank of New York. The New York Fed later repaid JPMorgan that amount. On Tuesday, JPMorgan advanced another $51 billion.
Shai Waisman, a lawyer for Weil, Gotshal & Manges, LLP representing Lehman Brothers, in his opening statement argued that Lehman's Brothers' downfall was the result of a "chain reaction" of events that were largely out of the investment bank's control.
"Lehman operated in an extremely unfavorable business environment," Waisman said, referring to declining asset values and low levels of liquidity.
Judge James Peck approved a motion that JPMorgan Chase & Co. will remain Lehman's clearing house through the bankruptcy proceedings. The issue arose over the past two days, when JPMorgan made the advances to Lehman to allow it to keep trading and "avoid a disruption of the financial markets," according to court filings.
Also on Tuesday, the House Oversight and Government Reform committee said it would hold a hearing Sept. 25 to examine the "regulatory mistakes and financial excesses" that led to Lehman's bankruptcy filing. It asked Lehman Chief Executive Richard Fuld to testify before the committee.
AP Business Writers Vinnee Tong and Madlen Read contributed to this story.
Barclays gets Lehman's North American banking and capital markets units for a Wall Street song
NEW YORK (AP) -- Lehman Brothers, which a year ago had a market capitalization of more than $33 billion, is now unloading its once-prized businesses for what passes as pocket change on Wall Street.
Barclays PLC, the third-largest British bank, took advantage of Lehman Brothers Holdings Inc.'s bankruptcy reorganization Tuesday to reach a deal for Lehman's North American investment banking and trading operations for just $250 million.
Barclays also picked up Lehman's New York headquarters and two data centers in New Jersey for $1.5 billion.
It marks a major coup for the U.K. bank, which agreed to buy the assets just days after walking away from a deal to purchase all of Lehman.
The U.S. investment bank filed for bankruptcy protection on Monday after it was unable to find financing or fresh capital to shore up its balance sheet amid a continued downturn in the credit markets.
The deals require approval from the bankruptcy court.
Meanwhile, Lehman executives continue to negotiate a potential sale of its prized investment management division, which includes money manager Neuberger Berman. The division was once valued by as much as $10 billion by Wall Street analysts, but now could fetch much less considering Lehman's bankruptcy proceedings.
A person familiar with the negotiations, who spoke on the condition of anonymity because the talks are ongoing, said Lehman was focusing on trying to sell the business to private-equity firms. The sale is expected to happen in a matter of days, the person said.
Bain Capital and Hellman & Friedman are the two top private-equity shops bidding on the investment management division, the person said, but Kohlberg Kravis Roberts & Co. is still in the running.
Barclays said it will acquire Lehman's North American banking operations, which include fixed income and equities sales, trading and research and investment banking business. The deal throws a lifeline to about 10,000 employees working in the divisions.
Barclays and Lehman reached the agreement hours after Lehman's first bankruptcy hearing in a crowded courtroom at the U.S. bankruptcy court in Manhattan, just steps away from Wall Street's iconic bull statue.
JPMorgan advanced Lehman $87 billion when the market opened Monday, acting in part on a request by the Federal Reserve Bank of New York. The New York Fed later repaid JPMorgan that amount. On Tuesday, JPMorgan advanced another $51 billion.
Shai Waisman, a lawyer for Weil, Gotshal & Manges, LLP representing Lehman Brothers, in his opening statement argued that Lehman's Brothers' downfall was the result of a "chain reaction" of events that were largely out of the investment bank's control.
"Lehman operated in an extremely unfavorable business environment," Waisman said, referring to declining asset values and low levels of liquidity.
Judge James Peck approved a motion that JPMorgan Chase & Co. will remain Lehman's clearing house through the bankruptcy proceedings. The issue arose over the past two days, when JPMorgan made the advances to Lehman to allow it to keep trading and "avoid a disruption of the financial markets," according to court filings.
Also on Tuesday, the House Oversight and Government Reform committee said it would hold a hearing Sept. 25 to examine the "regulatory mistakes and financial excesses" that led to Lehman's bankruptcy filing. It asked Lehman Chief Executive Richard Fuld to testify before the committee.
AP Business Writers Vinnee Tong and Madlen Read contributed to this story.
Monday, September 15, 2008
Lehman Brothers files for Chapter 11 protection
Monday September 15, 8:13 am ET
Lehman Brothers files for Chapter 11 bankruptcy protection
NEW YORK (AP) -- Lehman Brothers has filed for bankruptcy protection under the weight of $60 billion in soured real estate holdings.
The company's filing for Chapter 11 protection will allow it to restructure while creditor claims are held at bay. The filing was made Monday in the U.S. Bankruptcy Court in the Southern Disctrict of New York.
Lehman's last hope of surviving outside of court protection faded Sunday after British bank Barclays PLC withdrew its bid to buy the investment bank.
The 158-year-old investment bank had said earlier that none of its broker-dealer subsidiaries or other units would be included in the Chapter 11 filing. It says it is exploring the sale of its broker-dealer operations and is in "advanced discussions" to sell its investment management unit.
Lehman Brothers files for Chapter 11 bankruptcy protection
NEW YORK (AP) -- Lehman Brothers has filed for bankruptcy protection under the weight of $60 billion in soured real estate holdings.
The company's filing for Chapter 11 protection will allow it to restructure while creditor claims are held at bay. The filing was made Monday in the U.S. Bankruptcy Court in the Southern Disctrict of New York.
Lehman's last hope of surviving outside of court protection faded Sunday after British bank Barclays PLC withdrew its bid to buy the investment bank.
The 158-year-old investment bank had said earlier that none of its broker-dealer subsidiaries or other units would be included in the Chapter 11 filing. It says it is exploring the sale of its broker-dealer operations and is in "advanced discussions" to sell its investment management unit.
Stocks tumble amid new Wall Street landscape
Monday September 15, 1:57 pm ET By Tim Paradis, AP Business Writer
Stocks fall sharply following Lehman bankruptcy, Merrill sale; AIG remains worry, falls 44 pct
NEW YORK (AP) -- A stunning reshaping of the Wall Street landscape sent stocks tumbling Monday, but the pullback appeared relatively orderly -- perhaps because investors were unsurprised by the demise of Lehman Brothers Holdings Inc. and relieved by a takeover of Merrill Lynch & Co.
The Dow Jones industrial average fell 300 points, a number that has become familiar over the past year amid the turmoil in the financial sector. Bond prices soared as investors sought the safety of government debt.
Stocks also posted big losses in markets across much of the globe as investors absorbed Lehman's bankruptcy filing and what was essentially a forced sale of Merrill Lynch to Bank of America for $50 billion in stock. While those companies' situations had reached some resolution, the market remained anxious about American International Group Inc., which is seeking emergency funding to shore up its balance sheet. A faltering of the world's largest insurance company likely would have financial implications far beyond that of Lehman, the largest U.S. bankruptcy.
The swift developments are the biggest yet in the 14-month-old credit crises that stems from now toxic subprime mortgage debt.
Investors are worried that trouble at AIG and the bankruptcy filing by Lehman, felled by $60 billion in bad debt and a dearth of investor confidence, will touch off another series of troubles for banks and financial institutions that may be forced to further write down the value of their own debt assets. Wall Street had been hopeful six months ago that the collapse of Bear Stearns would mark the darkest day of the credit crisis.
AIG's troubles a week after its stock dropped 45 percent are worrisome for some investors because of the company's enormous balance sheet and the risks that troubles with that companies finances could spill over to the companies with which it does business. AIG, one of the 30 stocks that make up the Dow industrials, fell $5.31, or 44 percent, to $6.83 Monday as investors worried that it would be the subject of downgrades from credit ratings agencies.
Before the start of trading, there were fears that Monday's decline would even more severe.
Jeffrey Mortimer, chief investment officer at Charles Schwab Investment Management in San Francisco, said stocks' losses aren't steeper because the market expected Lehman would find a buyer or declare bankruptcy.
"This is showing that this was not completely unexpected," he said, of Lehman. He added that the Merrill deal removes one possible source of concern for investors. "This may have taken a player who might have been next out of the target zone."
Still, the market was fractious, and a sharper drop as the session wears on was still possible.
In early afternoon trading, the Dow fell 300.03, or 2.63 percent, to 11,121.96 after falling nearly 350 points seen in the early going.
Broader stock indicators also fell. The Standard & Poor's 500 index declined 33.06, or 2.64 percent, to 1,218.64, and the Nasdaq composite index fell 46.69, or 2.06 percent, to 2,218.64.
Declining issues outnumbered advancers by about 9 to 1 on the New York Stock Exchange, where volume came to a moderate 833.7 million shares.
Light, sweet crude dropped $4.15 to $97.03 on the New York Mercantile Exchange after damage to Gulf of Mexico oil infrastructure from Hurricane Ike was less than investors feared. Worries about a slower economy have also weighed on oil prices in recent weeks. Oil is down sharply from its mid-July highs when it hit a record over $147 a barrel.
Despite the pullback in oil, prices at the gas pump rose above $5 per gallon in some parts of the country Sunday after Ike left some the nation's refining capacity inoperable.
Investors will be watching to see whether the Dow moves below the 11,000 mark, a level it hasn't traded and closed under since mid-July. The S&P 500 last tested the 1,200 level in mid-July.
Bond prices surged as investors fled to the security of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, plunged to 3.52 percent from 3.72 percent late Friday. The dollar was lower against other major currencies, while gold prices rose.
AIG pared some of its losses after New York Gov. David Paterson said in a press conference the company will be allowed to access $20 billion of assets held by its subsidiaries to stay in business. Paterson asked the state's insurance regulators to in essence allow AIG to provide a bridge loan to itself. Investors are worried that the company could need up to $40 billion to aid its balance sheet.
Other financial stocks fell as investors worried about the strength of banks' balance sheets. Washington Mutual Inc. fell 44 cents, or 16 percent, to $2.29, while Wachovia Corp. fell $3.05, or 21 percent, to $11.22.
Investors did have some more solid footing than they might have predicted at the end of last week, when Lehman's troubles and those of AIG weighed on the markets. A global consortium of banks, working alongside government officials in New York, announced a $70 billion pool of funds to lend to troubled financial companies.
And the deal for Merrill Lynch pays a 70 percent premium to the brokerage's closing price Friday. The stock has been squeezed in recent weeks, leading many Wall Street veterans to point to the company as the next behind Lehman as likely to run into trouble with bearish investors and get hit by intensified selling. The deal to pair the company with Bank of America, a huge bank with a big asset base, removes some of the worries about Merrill would be the next to fall.
Merrill rose $2.63, or 15 percent, to $19.68, while Bank of America fell $6.26, or 19 percent, to $27.48.
Although Monday's losses were milder than analysts' worst fears, many market observers have said for months that a cathartic sell-off is necessary for Wall Street to purge its worries over bad debt and the tight credit conditions that have hobbled the economy. They reason that a scare and subsequent sell-off in the markets could establish conditions for a market bottom to form.
"This is sort of groundbreaking type stuff," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York.
Fullman, who has worked on Wall Street for 29 years, noted that the Dow contains companies, such as retailers like Wal-Mart Stores Inc. that could help cushion some of the selling in the financial sector. Wal-Mart fell 21 cents to $62.20, while Coca-Cola Co. rose 95 cents to $55.46.
"While they might get hit hard they won't get hit as hard," he said.
But even good news like a drop in oil and some resolution to fears about Merrill couldn't prevent widespread selling. Markets in Tokyo and several other Asian money centers were closed for holidays. Britain's FTSE 100 fell 3.92 percent, Germany's DAX index lost 2.74 percent, and France's CAC-40 fell 3.78 percent. The European Central Bank, the Bank of England, and the Swiss central bank stepped in an attempt to calm markets by making more short-term credit available to banks.
The reduced headcount of Wall Street firms Monday left Goldman Sachs Group Inc. and Morgan Stanley as the remaining big, independent firms. The two are slated to report quarterly results Tuesday and Wednesday, respectively.
Goldman Sachs fell $17.11, or 11 percent, to $137.10, while Morgan Stanley fell $4.24, or 11 percent, to $32.99.
The shake-up comes only a week after the government bailed out mortgage lenders Fannie Mae and Freddie Mac and ahead of sizable economic developments this week. The Fed is expected to make a decision on interest rates on Tuesday.
The Russell 2000 index of smaller companies fell 14.98, or 2.08 percent, to 705.28.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Stocks fall sharply following Lehman bankruptcy, Merrill sale; AIG remains worry, falls 44 pct
NEW YORK (AP) -- A stunning reshaping of the Wall Street landscape sent stocks tumbling Monday, but the pullback appeared relatively orderly -- perhaps because investors were unsurprised by the demise of Lehman Brothers Holdings Inc. and relieved by a takeover of Merrill Lynch & Co.
The Dow Jones industrial average fell 300 points, a number that has become familiar over the past year amid the turmoil in the financial sector. Bond prices soared as investors sought the safety of government debt.
Stocks also posted big losses in markets across much of the globe as investors absorbed Lehman's bankruptcy filing and what was essentially a forced sale of Merrill Lynch to Bank of America for $50 billion in stock. While those companies' situations had reached some resolution, the market remained anxious about American International Group Inc., which is seeking emergency funding to shore up its balance sheet. A faltering of the world's largest insurance company likely would have financial implications far beyond that of Lehman, the largest U.S. bankruptcy.
The swift developments are the biggest yet in the 14-month-old credit crises that stems from now toxic subprime mortgage debt.
Investors are worried that trouble at AIG and the bankruptcy filing by Lehman, felled by $60 billion in bad debt and a dearth of investor confidence, will touch off another series of troubles for banks and financial institutions that may be forced to further write down the value of their own debt assets. Wall Street had been hopeful six months ago that the collapse of Bear Stearns would mark the darkest day of the credit crisis.
AIG's troubles a week after its stock dropped 45 percent are worrisome for some investors because of the company's enormous balance sheet and the risks that troubles with that companies finances could spill over to the companies with which it does business. AIG, one of the 30 stocks that make up the Dow industrials, fell $5.31, or 44 percent, to $6.83 Monday as investors worried that it would be the subject of downgrades from credit ratings agencies.
Before the start of trading, there were fears that Monday's decline would even more severe.
Jeffrey Mortimer, chief investment officer at Charles Schwab Investment Management in San Francisco, said stocks' losses aren't steeper because the market expected Lehman would find a buyer or declare bankruptcy.
"This is showing that this was not completely unexpected," he said, of Lehman. He added that the Merrill deal removes one possible source of concern for investors. "This may have taken a player who might have been next out of the target zone."
Still, the market was fractious, and a sharper drop as the session wears on was still possible.
In early afternoon trading, the Dow fell 300.03, or 2.63 percent, to 11,121.96 after falling nearly 350 points seen in the early going.
Broader stock indicators also fell. The Standard & Poor's 500 index declined 33.06, or 2.64 percent, to 1,218.64, and the Nasdaq composite index fell 46.69, or 2.06 percent, to 2,218.64.
Declining issues outnumbered advancers by about 9 to 1 on the New York Stock Exchange, where volume came to a moderate 833.7 million shares.
Light, sweet crude dropped $4.15 to $97.03 on the New York Mercantile Exchange after damage to Gulf of Mexico oil infrastructure from Hurricane Ike was less than investors feared. Worries about a slower economy have also weighed on oil prices in recent weeks. Oil is down sharply from its mid-July highs when it hit a record over $147 a barrel.
Despite the pullback in oil, prices at the gas pump rose above $5 per gallon in some parts of the country Sunday after Ike left some the nation's refining capacity inoperable.
Investors will be watching to see whether the Dow moves below the 11,000 mark, a level it hasn't traded and closed under since mid-July. The S&P 500 last tested the 1,200 level in mid-July.
Bond prices surged as investors fled to the security of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, plunged to 3.52 percent from 3.72 percent late Friday. The dollar was lower against other major currencies, while gold prices rose.
AIG pared some of its losses after New York Gov. David Paterson said in a press conference the company will be allowed to access $20 billion of assets held by its subsidiaries to stay in business. Paterson asked the state's insurance regulators to in essence allow AIG to provide a bridge loan to itself. Investors are worried that the company could need up to $40 billion to aid its balance sheet.
Other financial stocks fell as investors worried about the strength of banks' balance sheets. Washington Mutual Inc. fell 44 cents, or 16 percent, to $2.29, while Wachovia Corp. fell $3.05, or 21 percent, to $11.22.
Investors did have some more solid footing than they might have predicted at the end of last week, when Lehman's troubles and those of AIG weighed on the markets. A global consortium of banks, working alongside government officials in New York, announced a $70 billion pool of funds to lend to troubled financial companies.
And the deal for Merrill Lynch pays a 70 percent premium to the brokerage's closing price Friday. The stock has been squeezed in recent weeks, leading many Wall Street veterans to point to the company as the next behind Lehman as likely to run into trouble with bearish investors and get hit by intensified selling. The deal to pair the company with Bank of America, a huge bank with a big asset base, removes some of the worries about Merrill would be the next to fall.
Merrill rose $2.63, or 15 percent, to $19.68, while Bank of America fell $6.26, or 19 percent, to $27.48.
Although Monday's losses were milder than analysts' worst fears, many market observers have said for months that a cathartic sell-off is necessary for Wall Street to purge its worries over bad debt and the tight credit conditions that have hobbled the economy. They reason that a scare and subsequent sell-off in the markets could establish conditions for a market bottom to form.
"This is sort of groundbreaking type stuff," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York.
Fullman, who has worked on Wall Street for 29 years, noted that the Dow contains companies, such as retailers like Wal-Mart Stores Inc. that could help cushion some of the selling in the financial sector. Wal-Mart fell 21 cents to $62.20, while Coca-Cola Co. rose 95 cents to $55.46.
"While they might get hit hard they won't get hit as hard," he said.
But even good news like a drop in oil and some resolution to fears about Merrill couldn't prevent widespread selling. Markets in Tokyo and several other Asian money centers were closed for holidays. Britain's FTSE 100 fell 3.92 percent, Germany's DAX index lost 2.74 percent, and France's CAC-40 fell 3.78 percent. The European Central Bank, the Bank of England, and the Swiss central bank stepped in an attempt to calm markets by making more short-term credit available to banks.
The reduced headcount of Wall Street firms Monday left Goldman Sachs Group Inc. and Morgan Stanley as the remaining big, independent firms. The two are slated to report quarterly results Tuesday and Wednesday, respectively.
Goldman Sachs fell $17.11, or 11 percent, to $137.10, while Morgan Stanley fell $4.24, or 11 percent, to $32.99.
The shake-up comes only a week after the government bailed out mortgage lenders Fannie Mae and Freddie Mac and ahead of sizable economic developments this week. The Fed is expected to make a decision on interest rates on Tuesday.
The Russell 2000 index of smaller companies fell 14.98, or 2.08 percent, to 705.28.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Sunday, September 7, 2008
AirAsia takes risks with expansion amid downturn
Sunday September 7, 3:32 am ET By Eileen Ng, Associated Press Writer
Budget carrier AirAsia takes risky gamble with expansion amid downturn
KUALA LUMPUR, Malaysia (AP) -- AirAsia, the region's biggest budget carrier, is making a risky bet.
As soaring fuel prices have forced other airlines to cut back, shed jobs and ground planes, AirAsia is doing the opposite: increasing flights, adding routes and boosting capital investment.
Last month, it even gave away a million free seats (although passengers still had to pay taxes and fuel surcharges). The seven-year-old company is aiming to fill the vacuum as other airlines reduce capacity, betting that more travelers will opt for budget flights amid a global economic downturn.
Analysts say that if it survives the industry slump, AirAsia could come out a winner with increased customer loyalty and a strong route network to catch the growth wave when good times return.
"They are reasonably well positioned for the long run but there's always a trade-off. It's a long term decision, which will cause some short-term pain," said Damien Horth, Asia transport analyst at UBS AG in Hong Kong.
Of course, the strategy could also backfire badly.
Already there are signs of trouble. Last month, AirAsia reported a 95 percent plunge in its net profit for April-June quarter to 9.42 million ringgit ($2.9 million). But the company chalked that up mostly to a 77 million ringgit ($23 million) foreign exchange loss from a weakened Malaysian ringgit, not weakness in its underlying business.
Average load factor -- the percentage of seats taken up in an airplane -- dipped to a still relatively strong 76 percent, from 80 percent in 2007.
Chief Executive Tony Fernandes remains undaunted.
"We are focused and happy with our strategy. We won't sacrifice long-term (growth) for short-term profits," he told The Associated Press.
There are doubts, however, on whether AirAsia can fund its expansion.
It has a cash reserve of about 1 billion ringgit ($303 million) but outstanding debts stand at 5.4 billion ringgit ($1.6 billion), giving it a net debt position of 4.4 billion ringgit ($1.3 billion). Debts are set to grow as it receives new planes.
The carrier has firm orders for 175 Airbus A320 planes, to be delivered gradually up to 2014, as part of fleet replacement and expansion.
Chris Eng, analyst with OSK Securities in Malaysia, said AirAsia's growth prospects may be curbed while its joint-ventures in Thailand and Indonesia are expected to remain in the red.
"It will be challenging but we believe AirAsia can survive," Eng said, citing its efficient regional network and good cost control.
As it expands, AirAsia also faces a challenge in filling up capacity as consumer spending slows and competition increases from flag carrier Malaysia Airlines, which recently offered zero fares on surplus seats, analysts say.
"Everybody is now having to dig deeper into the well of consumer demand and the more they compete, the more fares go down," said Peter Harbison, executive chairman of the Center for Asia-Pacific Aviation in Sydney.
The International Air Transport Association has forecast a $5.2 billion loss this year for the global airline industry. It said crude oil price, currently averaging $113 a barrel, is still 55 percent higher than the 2007 average price while passenger demand growth is slowing even in Asia-Pacific.
At least two dozen airlines worldwide have closed down this year. Many low-cost airlines are also struggling despite escaping the worst of the downturn.
Europe's Ryanair and Southwest Airlines in the U.S.-- two of the most resilient budget carriers -- have cut capacity this year. Ryanair, which reported a second quarter loss, said it may face its first full-year losses in 2008.
UBS's Horth warned AirAsia may also plunge into the red for the first time this year with losses stretching into 2009, as its rapid expansion and aggressive pricing policy bite into revenue.
"Assuming oil prices remain around current levels, its certainly going to be tough. The management is taking a long term approach but investors may get scared," he said. Fuel prices account for half of AirAsia's cost.
AirAsia's stock has plunged by half from a year ago to around 1 ringgit (30 cents), but has risen from an all-time low of 0.765 ringgit (23 cents) in June.
Budget carrier AirAsia takes risky gamble with expansion amid downturn
KUALA LUMPUR, Malaysia (AP) -- AirAsia, the region's biggest budget carrier, is making a risky bet.
As soaring fuel prices have forced other airlines to cut back, shed jobs and ground planes, AirAsia is doing the opposite: increasing flights, adding routes and boosting capital investment.
Last month, it even gave away a million free seats (although passengers still had to pay taxes and fuel surcharges). The seven-year-old company is aiming to fill the vacuum as other airlines reduce capacity, betting that more travelers will opt for budget flights amid a global economic downturn.
Analysts say that if it survives the industry slump, AirAsia could come out a winner with increased customer loyalty and a strong route network to catch the growth wave when good times return.
"They are reasonably well positioned for the long run but there's always a trade-off. It's a long term decision, which will cause some short-term pain," said Damien Horth, Asia transport analyst at UBS AG in Hong Kong.
Of course, the strategy could also backfire badly.
Already there are signs of trouble. Last month, AirAsia reported a 95 percent plunge in its net profit for April-June quarter to 9.42 million ringgit ($2.9 million). But the company chalked that up mostly to a 77 million ringgit ($23 million) foreign exchange loss from a weakened Malaysian ringgit, not weakness in its underlying business.
Average load factor -- the percentage of seats taken up in an airplane -- dipped to a still relatively strong 76 percent, from 80 percent in 2007.
Chief Executive Tony Fernandes remains undaunted.
"We are focused and happy with our strategy. We won't sacrifice long-term (growth) for short-term profits," he told The Associated Press.
There are doubts, however, on whether AirAsia can fund its expansion.
It has a cash reserve of about 1 billion ringgit ($303 million) but outstanding debts stand at 5.4 billion ringgit ($1.6 billion), giving it a net debt position of 4.4 billion ringgit ($1.3 billion). Debts are set to grow as it receives new planes.
The carrier has firm orders for 175 Airbus A320 planes, to be delivered gradually up to 2014, as part of fleet replacement and expansion.
Chris Eng, analyst with OSK Securities in Malaysia, said AirAsia's growth prospects may be curbed while its joint-ventures in Thailand and Indonesia are expected to remain in the red.
"It will be challenging but we believe AirAsia can survive," Eng said, citing its efficient regional network and good cost control.
As it expands, AirAsia also faces a challenge in filling up capacity as consumer spending slows and competition increases from flag carrier Malaysia Airlines, which recently offered zero fares on surplus seats, analysts say.
"Everybody is now having to dig deeper into the well of consumer demand and the more they compete, the more fares go down," said Peter Harbison, executive chairman of the Center for Asia-Pacific Aviation in Sydney.
The International Air Transport Association has forecast a $5.2 billion loss this year for the global airline industry. It said crude oil price, currently averaging $113 a barrel, is still 55 percent higher than the 2007 average price while passenger demand growth is slowing even in Asia-Pacific.
At least two dozen airlines worldwide have closed down this year. Many low-cost airlines are also struggling despite escaping the worst of the downturn.
Europe's Ryanair and Southwest Airlines in the U.S.-- two of the most resilient budget carriers -- have cut capacity this year. Ryanair, which reported a second quarter loss, said it may face its first full-year losses in 2008.
UBS's Horth warned AirAsia may also plunge into the red for the first time this year with losses stretching into 2009, as its rapid expansion and aggressive pricing policy bite into revenue.
"Assuming oil prices remain around current levels, its certainly going to be tough. The management is taking a long term approach but investors may get scared," he said. Fuel prices account for half of AirAsia's cost.
AirAsia's stock has plunged by half from a year ago to around 1 ringgit (30 cents), but has risen from an all-time low of 0.765 ringgit (23 cents) in June.
Saturday, September 6, 2008
Government may soon back troubled mortgage giants
Friday September 5, 11:12 pm ET By Alan Zibel, AP Business Writer
Government may soon take over troubled mortgage finance giants Fannie Mae, Freddie Mac
WASHINGTON (AP) -- The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies, which together hold or guarantee half of the nation's mortgage debt, a person briefed on the matter said Friday night.
Some of the details of the intervention, which could cost taxpayers billions, were not yet available, but are expected to include the departure of Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to the source, who asked not to be named because the plan was yet to be announced.
Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies' chief regulator, met Friday afternoon with the top executives from the mortgage companies and informed them of the government's plan to put the troubled companies into a conservatorship.
The news, first reported on The Wall Street Journal's Web site, came after stock markets closed. In after-hours trading Fannie Mae's shares plunged $1.54, or 22 percent, to $5.50. Freddie Mac's shares fell $1.06, or almost 21 percent, to $4.04. Common stock in the companies will be worth little to nothing after the government's actions.
The news also followed a report Friday by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.
That confirmed what investors saw in Fannie and Freddie's recent financial results: trouble in the mortgage market has shifted to homeowners who had solid credit but took out exotic loans with little or no proof of their income and assets.
Fannie Mae and Freddie Mac lost a combined $3.1 billion between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments.
While both companies said they had enough resources to withstand the losses, many investors believe their financial cushions could wither away as defaults and foreclosures mount.
Many in Washington and on Wall Street hadn't expected Treasury Secretary Henry Paulson to intervene unless the companies had trouble issuing debt to fund their operations.
This summer, Congress passed a plan to provide unlimited government loans to Fannie and Freddie and to purchase stock in the two companies if needed.
Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.
Supporters, however, argue the Bush administration had little choice but to support Fannie and Freddie, which together hold or guarantee $5 trillion in mortgages -- almost half the nation's total.
Representatives of Fannie and Freddie declined to comment on the government assistance plan.
Treasury spokeswoman Brookly McLaughlin said officials "have been in regular communications" with Fannie and Freddie, but refused to comment saying, "We are not going to comment on rumors."
Concern has been growing that a government rescue of Fannie and Freddie could not only wipe out common stockholders, but also be costly for scores of investment, banking and insurance companies that hold billions of dollars in their preferred shares.
Paulson has been in contact in recent weeks with foreign governments that hold billions of dollars of Fannie and Freddie debt to reassure them that the United States recognizes the importance of the two companies.
The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.
Mudd, the son of TV anchor Roger Mudd, was elevated to Fannie Mae's top post in December 2004 when chief executive Franklin Raines and chief financial officer Timothy Howard were swept out of office in an accounting scandal. Syron was named Freddie Mac's CEO in 2003, replacing former chief Gregory Parseghian, who was ousted in after being implicated in accounting irregularities.
He formerly was executive chairman of Thermo Electron Corp., a Waltham, Mass.-based maker of scientific equipment, served head of the American Stock Exchange was president of the Federal Reserve Bank of Boston in the early 1990s.
Fannie Mae was created by the government in 1938, and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.
A government takeover could cost taxpayers up to $25 billion, according to the Congressional Budget Office.
But the epic decision highlights the size of the threats facing the housing market and the economy. On Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns by JP Morgan Chase.
AP Business Writers Martin Crutsinger and Jeannine Aversa contributed to this report.
Government may soon take over troubled mortgage finance giants Fannie Mae, Freddie Mac
WASHINGTON (AP) -- The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies, which together hold or guarantee half of the nation's mortgage debt, a person briefed on the matter said Friday night.
Some of the details of the intervention, which could cost taxpayers billions, were not yet available, but are expected to include the departure of Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to the source, who asked not to be named because the plan was yet to be announced.
Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies' chief regulator, met Friday afternoon with the top executives from the mortgage companies and informed them of the government's plan to put the troubled companies into a conservatorship.
The news, first reported on The Wall Street Journal's Web site, came after stock markets closed. In after-hours trading Fannie Mae's shares plunged $1.54, or 22 percent, to $5.50. Freddie Mac's shares fell $1.06, or almost 21 percent, to $4.04. Common stock in the companies will be worth little to nothing after the government's actions.
The news also followed a report Friday by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.
That confirmed what investors saw in Fannie and Freddie's recent financial results: trouble in the mortgage market has shifted to homeowners who had solid credit but took out exotic loans with little or no proof of their income and assets.
Fannie Mae and Freddie Mac lost a combined $3.1 billion between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments.
While both companies said they had enough resources to withstand the losses, many investors believe their financial cushions could wither away as defaults and foreclosures mount.
Many in Washington and on Wall Street hadn't expected Treasury Secretary Henry Paulson to intervene unless the companies had trouble issuing debt to fund their operations.
This summer, Congress passed a plan to provide unlimited government loans to Fannie and Freddie and to purchase stock in the two companies if needed.
Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.
Supporters, however, argue the Bush administration had little choice but to support Fannie and Freddie, which together hold or guarantee $5 trillion in mortgages -- almost half the nation's total.
Representatives of Fannie and Freddie declined to comment on the government assistance plan.
Treasury spokeswoman Brookly McLaughlin said officials "have been in regular communications" with Fannie and Freddie, but refused to comment saying, "We are not going to comment on rumors."
Concern has been growing that a government rescue of Fannie and Freddie could not only wipe out common stockholders, but also be costly for scores of investment, banking and insurance companies that hold billions of dollars in their preferred shares.
Paulson has been in contact in recent weeks with foreign governments that hold billions of dollars of Fannie and Freddie debt to reassure them that the United States recognizes the importance of the two companies.
The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.
Mudd, the son of TV anchor Roger Mudd, was elevated to Fannie Mae's top post in December 2004 when chief executive Franklin Raines and chief financial officer Timothy Howard were swept out of office in an accounting scandal. Syron was named Freddie Mac's CEO in 2003, replacing former chief Gregory Parseghian, who was ousted in after being implicated in accounting irregularities.
He formerly was executive chairman of Thermo Electron Corp., a Waltham, Mass.-based maker of scientific equipment, served head of the American Stock Exchange was president of the Federal Reserve Bank of Boston in the early 1990s.
Fannie Mae was created by the government in 1938, and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.
A government takeover could cost taxpayers up to $25 billion, according to the Congressional Budget Office.
But the epic decision highlights the size of the threats facing the housing market and the economy. On Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns by JP Morgan Chase.
AP Business Writers Martin Crutsinger and Jeannine Aversa contributed to this report.
Friday, September 5, 2008
World markets sink after Wall Street plunge
Friday September 5, 10:43 am ET By Louise Watt, Associated Press Writer
World markets sink after Wall Street plunge as weak US data undercut recovery hopes
LONDON (AP) -- World stock markets fell sharply Friday in the wake of a sell-off on Wall Street amid mounting concerns about a slumping U.S. economy and its impact on global growth.
Wall Street extended its decline Friday after the U.S. government disappointed investors with news that the economy shed jobs for the eighth straight month in August and at a faster-than-expected pace. In morning trading, the Dow Jones industrial average fell 34.33, or 0.31 percent, to 11,153.79.
The Labor Department said payrolls shrank by 84,000 last month, more than the 75,000 economists predicted, and higher than the 51,000 jobs lost in July. The unemployment rate rose to 6.1 percent from 5.7 percent.
Friday's report followed disappointing reports on U.S. retail sales and jobless claims overnight, eroding investors' hopes for a late-year recovery in the world's biggest economy.
By mid-afternoon in Europe, Britain's FTSE-100 was down 1.09 percent to 5,303.90, Germany's DAX lost 1.82 percent to 6,165.19, and France's CAC 40 fell 1.42 percent to 4,242.74.
In Moscow, the ruble-denominated RTS benchmark was down 6.51 percent in late afternoon trading, sinking to the 1,400-point level which has not been seen since June 2006. Moscow-based analysts say they see the market going further down to 1,300 points this year.
Russia's U.S. dollar-denominated MICEX was down 5.54 percent.
Asian markets also fell. In Japan, the benchmark Nikkei 225 index sank 2.75 percent to 12,212.23. Hong Kong's Hang Seng index tumbled 2.24 percent to 19,933.28, dropping below 20,000 for the first time in more than a year.
Markets in India, Australia and Singapore also were down sharply. China's Shanghai index slid 3.3 percent to its lowest close in 21 months.
European markets, adjusting to the falls in Asia and the 3 percent declines seen in the U.S. markets overnight, also traded lower.
"The financials are once again under pressure following comments from Bill Gross at PIMCO -- the world's largest bond fund -- that implied the market was set to experience a "financial tsunami," said Stephen Pope, chief global markets strategist for Cantor Fitzgerald.
"All banks are weaker, although with gloomy euro-zone economic news in the system, and a hawkish policy still persisting from the ECB, Irish and Spanish names are especially hard pressed," he added.
Mobile phone maker Nokia's announcement that it expects its global market share to be hit in the third quarter saw its shares tumble more than 10 percent. The news dragged down the shares of other mobile handset makers, said Pope, adding that the telecommunications sector was down 7.6 percent.
Mark Matthews, chief Asia strategist at Merrill Lynch, said emerging markets in Asia and other regions have been hit hard lately as investors withdrew funds and faith in the global economy withered.
"People want to be confidant that the economy of the world can get better, and right now they don't have that confidence," Matthews said. "They think the global economy is still going to get worse."
News Thursday from major U.S. retailers that shoppers curtailed their spending last month helped send the Dow Jones industrial average down 344.65 points, or 2.99 percent, to 11,188.23. The Nasdaq composite index declined 3.2 percent, or 74.69 points, to 2,259.04.
"It was ugly in the States; many are still taking their leads from the U.S.," said Lorraine Tan, director at Standard & Poor's equity research in Singapore. "And there's just an overall concern with global growth."
Investors bracing for weak U.S. jobs figures fueled selling in Japan, said Masaru Ohnishi, equity strategist at JP Morgan Securities in Tokyo.
But because markets have already fallen so sharply, they are "likely to rebound if results are good," he said.
Toyota Motor Corp. retreated 2.5 percent to 4,750 yen, Nissan Motor Co. tumbled 3.6 percent to 800 yen, and Mazda Motor lost 6.9 percent to 527 yen.
Sony Corp. dived 4.2 percent to 3,880 yen after the consumer electronics maker announced Thursday a worldwide recall of 440,000 Vaio laptop computers due to a wiring flaw that could cause overheating.
In Hong Kong, investors sent Chinese commodity producers spiraling, with Angang Steel losing 7.5 percent to HK$8.56 and Aluminum Corp. of China, or Chalco, down 3.2 percent to HK$6.19.
Property stocks fell sharply after Goldman Sachs issued a pessimistic outlook for the sector. Hong Kong's leading property firm Sun Hung Kai tanked more than 6 percent, while Cheung Kong plunged 5.7 percent.
In Shanghai, selling was heavy across the board, with the key index falling 3.3 percent to 2,202.45. PetroChina, the Shanghai index's biggest traded share, sank 4.2 percent.
In India, the Sensex fell 2.8 percent to 14,483.83.
AP reporters Tomoko A. Hosaka in Tokyo, Jeremiah Marquez in Hong Kong and Joe Bel Bruno and Tim Paradis in New York contributed to this report.
World markets sink after Wall Street plunge as weak US data undercut recovery hopes
LONDON (AP) -- World stock markets fell sharply Friday in the wake of a sell-off on Wall Street amid mounting concerns about a slumping U.S. economy and its impact on global growth.
Wall Street extended its decline Friday after the U.S. government disappointed investors with news that the economy shed jobs for the eighth straight month in August and at a faster-than-expected pace. In morning trading, the Dow Jones industrial average fell 34.33, or 0.31 percent, to 11,153.79.
The Labor Department said payrolls shrank by 84,000 last month, more than the 75,000 economists predicted, and higher than the 51,000 jobs lost in July. The unemployment rate rose to 6.1 percent from 5.7 percent.
Friday's report followed disappointing reports on U.S. retail sales and jobless claims overnight, eroding investors' hopes for a late-year recovery in the world's biggest economy.
By mid-afternoon in Europe, Britain's FTSE-100 was down 1.09 percent to 5,303.90, Germany's DAX lost 1.82 percent to 6,165.19, and France's CAC 40 fell 1.42 percent to 4,242.74.
In Moscow, the ruble-denominated RTS benchmark was down 6.51 percent in late afternoon trading, sinking to the 1,400-point level which has not been seen since June 2006. Moscow-based analysts say they see the market going further down to 1,300 points this year.
Russia's U.S. dollar-denominated MICEX was down 5.54 percent.
Asian markets also fell. In Japan, the benchmark Nikkei 225 index sank 2.75 percent to 12,212.23. Hong Kong's Hang Seng index tumbled 2.24 percent to 19,933.28, dropping below 20,000 for the first time in more than a year.
Markets in India, Australia and Singapore also were down sharply. China's Shanghai index slid 3.3 percent to its lowest close in 21 months.
European markets, adjusting to the falls in Asia and the 3 percent declines seen in the U.S. markets overnight, also traded lower.
"The financials are once again under pressure following comments from Bill Gross at PIMCO -- the world's largest bond fund -- that implied the market was set to experience a "financial tsunami," said Stephen Pope, chief global markets strategist for Cantor Fitzgerald.
"All banks are weaker, although with gloomy euro-zone economic news in the system, and a hawkish policy still persisting from the ECB, Irish and Spanish names are especially hard pressed," he added.
Mobile phone maker Nokia's announcement that it expects its global market share to be hit in the third quarter saw its shares tumble more than 10 percent. The news dragged down the shares of other mobile handset makers, said Pope, adding that the telecommunications sector was down 7.6 percent.
Mark Matthews, chief Asia strategist at Merrill Lynch, said emerging markets in Asia and other regions have been hit hard lately as investors withdrew funds and faith in the global economy withered.
"People want to be confidant that the economy of the world can get better, and right now they don't have that confidence," Matthews said. "They think the global economy is still going to get worse."
News Thursday from major U.S. retailers that shoppers curtailed their spending last month helped send the Dow Jones industrial average down 344.65 points, or 2.99 percent, to 11,188.23. The Nasdaq composite index declined 3.2 percent, or 74.69 points, to 2,259.04.
"It was ugly in the States; many are still taking their leads from the U.S.," said Lorraine Tan, director at Standard & Poor's equity research in Singapore. "And there's just an overall concern with global growth."
Investors bracing for weak U.S. jobs figures fueled selling in Japan, said Masaru Ohnishi, equity strategist at JP Morgan Securities in Tokyo.
But because markets have already fallen so sharply, they are "likely to rebound if results are good," he said.
Toyota Motor Corp. retreated 2.5 percent to 4,750 yen, Nissan Motor Co. tumbled 3.6 percent to 800 yen, and Mazda Motor lost 6.9 percent to 527 yen.
Sony Corp. dived 4.2 percent to 3,880 yen after the consumer electronics maker announced Thursday a worldwide recall of 440,000 Vaio laptop computers due to a wiring flaw that could cause overheating.
In Hong Kong, investors sent Chinese commodity producers spiraling, with Angang Steel losing 7.5 percent to HK$8.56 and Aluminum Corp. of China, or Chalco, down 3.2 percent to HK$6.19.
Property stocks fell sharply after Goldman Sachs issued a pessimistic outlook for the sector. Hong Kong's leading property firm Sun Hung Kai tanked more than 6 percent, while Cheung Kong plunged 5.7 percent.
In Shanghai, selling was heavy across the board, with the key index falling 3.3 percent to 2,202.45. PetroChina, the Shanghai index's biggest traded share, sank 4.2 percent.
In India, the Sensex fell 2.8 percent to 14,483.83.
AP reporters Tomoko A. Hosaka in Tokyo, Jeremiah Marquez in Hong Kong and Joe Bel Bruno and Tim Paradis in New York contributed to this report.
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