Stocks sink amid Wall St crisis
By Michael Mackenzie and Aline van Duyn in New York, Krishna Guha in Washington and Francesco Guerrera in London
Published: September 15 2008 21:41 | Last updated: September 16 2008 00:28
US stocks suffered their biggest one-day decline on Monday since the market reopened after the terrorist attacks of September 11, 2001, as investors sought the safety of cash and government debt following the historic collapse of Lehman Brothers and the emergency sale of Merrill Lynch to Bank of America.
The unprecedented changes on Wall Street - which was also gripped by rising fears about the health of AIG, the giant insurer - left investors more concerned with preserving their capital than in generating returns. Yields on short-dated government debt collapsed, falling far below 1 per cent, amid frenzied buying.
EDITOR’S CHOICE
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Full coverage: Crisis on Wall Street - Sep-12
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Angry staff point finger at management - Sep-15
Analysis: How brinkmanship was not enough to save Lehman - Sep-15
The Federal Reserve battled a ferocious storm in the overnight money market, where the federal funds rate briefly hit 6 per cent - three times the target rate of 2 per cent - as financial institutions scrambled to raise cash. The Fed injected a total of $70bn in liquidity, before the fed funds rate finally fell back later.
The US central bank meets on Tuesday amid market speculation that it could cut rates by 25 or even 50 basis points. However, unless market chaos escalates further, the Fed is likely to keep rates on hold while indicating that it will cut rates if required in the future.
The S&P 500 fell 4.7 per cent, its worst one-day decline in seven years and closed below 1,200, its lowest level since October 2005. The FTSE 100 fell 3.9 per cent, while the FTSE Eurofirst 300 dropped 3.6 per cent. The yield on the US 30-year bond fell to an all-time low of 4.02 per cent as investors worried about recession.
“It was a brutal day across risky markets,” said Ted Wieseman, economist at Morgan Stanley. “As ugly a day as it was for stocks, credit did worse.”
Bank of America also came under pressure after it announced its $29-a-share offer for Merrill Lynch. Shares in BofA fell 21 per cent, while Merrill ended the day barely in positive territory at $17.06. Wachovia shares were down 25 per cent and Washington Mutual was down 27 per cent.
It emerged on Monday that Fed and Treasury officials encouraged Merrill’s tie-up with BofA, telling John Thain, its chief executive, on Friday that his bank would be next to come under attack once Lehman failed and it had to find a solution quickly.
The S&P financials index fell more than 10 per cent as the cost of credit insurance surged for major banks.
Goldman Sachs shares fell 12.1 per cent ahead of its third-quarter fiscal results on Tuesday. Morgan Stanley declined 13.5 per cent.
“The locusts may be running out of big names to attack, but there are still some big names in the market’s sights,” said Alan Ruskin, at RBS Greenwich Capital.
The European Central Bank and the Bank of England together poured about $51bn into markets. Oil closed well below $100 a barrel, but the dollar rallied against the euro and sterling
Sentiment soured as New York state regulators threw AIG a lifeline by allowing it to use $20bn of assets held by its subsidiaries as collateral for a bridge loan. AIG shares fell 61 per cent. AIG, one of the world’s biggest insurers, forms a key part of the US financial system.
Its failure would be like “taking the foundation stone out of a skyscraper”, said Trevor Jones, managing director of consultants Insurance Security Services.
Copyright The Financial Times Limited 2008
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