Published September 16, 2008

US FINANCIAL CRISIS
Deal fails to calm jangling nerves

Dow plunges at opening as traders say confidence is at a low point

By ANDREW MARKS
NEW YORK CORRESPONDENT
Email this article
Print article
Feedback

US STOCKS were battered in the early going yesterday as the collapse of Lehman Brothers and the takeover of Merrill Lynch, engineered in seemingly last-minute fashion on Sunday, shook investor confidence down to the bone.

High anxiety: Workers outside Lehman's offices in London yesterday. Lehman's British operations were placed in administration to protect them from creditors

The Dow Jones Industrials plummeted to a triple digit decline within the first minutes of trading yesterday morning, registering a 270-point loss at 940 am in New York, a decline that grew as large as 318 points minutes later before a slight rebound brought the decline to 288 points, or 2.65 per cent at 10 am.

The broader S&P 500 index was faring similarly, sinking by 31 points, or 2.4 per cent, as it see-sawed between bad and worse in the first half hour of trading.

The technology-laden Nasdaq Composite was falling by 40 points, or 1.8 per cent, after an initial decline of 60 points or 2.65 per cent.

Market strategists were trying to make sense of the historic series of events that have unfolded since the market's closing bell last Friday.

'This is not an easy one to process, I think it'll be a couple of days at least before we can say with any certainty how the market will ultimately take these events,' said S G Cowen head equity trader John O'Donoghue.

The tumble came in reaction to a weekend of high drama on Wall Street that at the very least promises to forever change the landscape for the US finance and securities brokerage industry, and is the latest sign that the financial crisis that has gripped the world for nearly a year now is deepening profoundly.

Lehman Brothers bowed to the inevitable and filed for Chapter 11 bankruptcy protection, sealing its fate and moving the 158-year old securities firm into liquidation mode.

Merrill Lynch, facing the same pressures that began Lehman's extraordinary demise just a week ago, agreed on Sunday to sell itself to Bank of America for roughly US$50 billion, or US$29 per share, to avert a deepening financial crisis at the firm.

'Confidence is at a low point, it's really collapsed,' said Hugh Johnson, chief investment officer at Johnson Illington Advisors. 'With the rescue of Fannie and Freddie, we thought the worst had passed. Now we know it hasn't.'

The problem for Wall Street at the moment, he said, is that unlike with the Bear Stearns bailout or even the takeover of Fannie Mae and Freddie Mac, there is no sense of relief after the weekend's events.

'Before anyone has time to even begin to absorb the implications of Lehman's failure or Merrill's forced sale, we're looking at AIG's crisis and how that's going to be resolved,' observed Mr Johnson.

'The natural reaction at this point is to run for cover, sell what you have to and wait and see how much worse this crisis can get,' he added.

Indeed, the giant insurer AIG may not survive the week if the Federal Reserve does not float the insurance company a US$40 billion bridge loan it requested on Sunday night in the face of a potential downgrade from credit ratings agencies that would allow counterparties to withdraw capital from their contracts with the company.

AIG has reportedly rejected a cash infusion by J C Flowers and other private equity companies because the deal would have granted the firms the possibility of taking over AIG. Separately, Kohlberg Kravis Roberts and TPG offered to support AIG with fresh capital pending a bridge loan to AIG from the Fed.

To help Wall Street brace for Lehman's bankruptcy, the Federal Reserve widened the collateral it accepts for emergency loans to securities firms.

A group of 10 banks that includes JPMorgan Chase, Goldman Sachs and Citigroup separately formed a US$70 billion fund to ensure market liquidity.

Major European central banks yesterday said that they were prepared to inject billions into global money markets to ensure that the weekend's turmoil on Wall Street does not spread to the rest of world's financial systems.

Adding to the woes emanating directly from Wall Street yesterday, investors were also faced with a US dollar in retreat and a big tumble on the European stock markets as major banks like UBS came under severe pressure.