here we go: "Biggest drop for US stocks since 9/11"

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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
Fed holds fresh AIG crisis talks - Sep-16
Full coverage: Crisis on Wall Street - Sep-12
Shocked City braced for more hits - Sep-15
Exodus of employees told to ‘move on’ - Sep-15
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

http://www.ft.com/cms/s/0/627f02ac-8362 ... 07658.html

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...the powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations.

Carroll Quigley, Tragedy and Hope: A History of the World in Our Time (1966)

http://en.wikipedia.org/wiki/Bank_for_I ... ettlements

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http://en.wikipedia.org/wiki/Dead_cat_bounce

[bigearth]

Paulson and Bernanke savaged over bailout plan

By Stephen Foley in New York
Wednesday, 24 September 2008


GETTY IMAGES

The US Treasury Secretary, Henry Paulson, left, testifies before the Senate as the Federal Reserve Board chairman, Ben Bernanke, waits his turn


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The Bush administration's plan for a $700bn bailout of financial markets was savaged by lawmakers on Capitol Hill, who demanded more time to consider the potential costs to the taxpayer and said they would insist on additional measures to punish Wall Street for excesses that have taken the economy to the edge of disaster.

In a piece of political theatre more closely followed by the world's financial markets than any in memory, lawmakers demanded more details of which firms would benefit, called for extra help for the American homeowners at the sharp end of the credit crisis, and suggested that bank executives accept a cap on their pay in return for the government help.

Ben Bernanke and Henry Paulson, the college professor and the Wall Street boss who have found themselves fighting to save the world financial system, went to Capitol Hill yesterday to try to sell a plan launched at the height of the financial panic last week with high hopes of cross-party support.

But at the hearing in front of the Senate banking committee, lawmakers passed on the furious reaction of their constituents, who see an unprecedented sum of taxpayer money being used to rescue banks brought low by their ill-advised investments in toxic mortgage derivatives.

Mr Paulson, who left Goldman Sachs to become Treasury Secretary two years ago, said that thousands of banks and other financial institutions – including foreign firms – would be eligible to sell those derivatives to the US government, in an effort to get the credit markets moving again.

And Mr Bernanke, who has been chairman of the Federal Reserve since 2006, said that the government's unprecedented intervention might ultimately be relatively modest, if it encourages other investors to finally start buying the toxic assets that are currently impossible to value.

Members of the Senate banking committee nonetheless lashed out at Mr Paulson for presenting them with an open-ended plan, short on detail, which would hand him extraordinary powers to spend taxpayer money with little Congressional oversight and fewer restraints on how the cash is used.

Jim Bunning, a Republican Senator, said the plan would "take Wall Street's pain and spread it to the taxpayers". And Richard Shelby, the most senior Republican on the committee, said Congress probably wouldn't solve this crisis by "spending a massive amount of money on bad securities". Chris Dodd, the Democrat chairman, said the plan was "unacceptable" in its current form.

A grim-faced Mr Paulson agreed that the blame lay with excesses on Wall Street and the failure of regulators, but that his $700bn bailout plan was better than letting financial markets fail. "You're angry and I'm angry that taxpayers are on the hook. But guess what, they are already on the hook for the system we all let happen," he said. "If the system doesn't work the way it needs to work, people aren't going to get the loans they need."

Mr Bernanke, one of the world's foremost scholars on the causes of the Great Depression in the 1930s, said jobs would be lost and economic growth would shrivel if there is no end to the crisis on Wall Street. The losses on mortgage derivatives, which have now passed $500bn (£270bn), have already caused financial institutions to shrink their activities and made it difficult for people to get mortgages. An all-out panic could cut off funding to business throughout the economy, he said.

"I'm a college professor," he told lawmakers. "I was criticised for taking this job without having worked on Wall Street. I have no interest or connections on Wall Street. My interest is solely for the strength and recovery of the US economy."

With the political wrangling set to continue, credit markets showed more strain yesterday. Cash was flowing back into money market funds, the epicentre of last week's panic, but Libor, the London inter-bank interest rate which falls when banks show more willingness to lend to each other, was slightly higher.

And the first corporate bond issue for two weeks, by the construction equipment group Caterpillar, showed the increased costs that the crisis is now piling on to businesses. It raised $1.3bn to fund its day-to-day operations, and had to pay interest rates 3.2 per cent and 3.25 per cent above the rate on US Treasuries. That compares to premia of 1.75 per cent and 2.05 per cent last time it issued similar bonds.

Mr Paulson refused to say exactly what assets the government will buy. He suggested the money would be spent in tranches, using different pricing mechanisms for different types of assets. The aim, Mr Bernanke said, was to find a value that reflected how much money the holders of the underlying mortgages and other loans would ultimately pay back. The taxpayer might ultimately make a profit.

The United Nations General Assembly also addressed the financial crisis yesterday. French President Nicolas Sarkozy called for a summit of world leaders. "We have retreated too long when faced with the need to give the world the institutions that will regulate it," he said. "Let us build a regulated capitalism in which whole swathes of financial activity are not left to the sole judgment of market operators."

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http://en.wikipedia.org/wiki/Dead_cat_bounce

Leading article: Ominous signs that this crisis is far from over

Our governments still have much to do to rescue our economies

Thursday, 25 September 2008

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The bulls charged back into the arena much too soon. When news filtered out a week ago of an unprecedented United States Government plan to nationalise the toxic debt of Wall Street, American stock markets responded as if salvation was finally on its way. The euphoria was shared here in Britain. Our own FTSE 100 registered its biggest single-day jump in its history last Friday.

After months of panic selling, investors suddenly began to buy banking shares. Our own Government's orchestrated merger of the sickly HBOS with Lloyds TSB helped generate a perception that the financial services sector was emerging from the woods.

Rarely has the colour drained away so quickly from a new dawn. The two candidates for the White House, John McCain and Barack Obama, have been objecting to the $700bn plan of the US Treasury Secretary Hank Paulson and the Federal Reserve Chairman Ben Bernanke. And the US Congress is refusing to sign off on it until members are satisfied that certain safeguards are met.

The delay has depressed markets anew. Share prices on both sides of the Atlantic have been tumbling again. And the banks are once more in the firing line. HBOS shares have been subject to a renewed pounding, as investors begin to doubt whether the merger will actually go through. If it fails to do so, the implications for Gordon Brown, who made much of his brokering of the deal, will surely be dire.

Meanwhile, Congress has woken up to the implications of the plan for US taxpayers. They are holding the process up with demands that the reckless speculators be punished. They also want the plan to help those poor Americans at risk of losing their homes. The call on Capitol Hill is to save Main Street, not just Wall Street.

Mr McCain and Mr Obama are right to want to ensure the greed-driven architects of this mess do not get away scot-free. Radical new regulation of the global financial sector is surely a political inevitability. But the frustrations of Mr Paulson and Mr Bernanke over these delays to the implementation of their rescue plan are equally understandable. Every day that the banking sector remains too scared to lend imperils further the wider economy. Businesses are being starved of money. Householders are unable to get mortgages at reasonable rates. As the world's most successful investor, Warren Buffett, put it yesterday, the West is facing "an economic Pearl Harbor".

The primary goal of policy-makers must be to protect the wider economy. Questions of moral hazard and regulatory reform should not be ignored, but they must be dealt with after the financial system has been stabilised.

Yet the larger problem with the Paulson/ Bernanke plan is not that it encourages moral hazard, but that it might not get to the root of the sickness in the credit markets. Some economists have made the case in recent days that the true cause of the banks' failure to lend to each other is not too many illiquid debts on their books, but simple insolvency among many of them. In other words, the banks need to recapitalise by raising vast sums from their existing shareholders or new investors (possibly the US Government) before funds begin to flow on a healthy scale again.

Mr Paulson and Mr Bernanke should use this hiatus to evaluate this argument. If it turns out to be close to the truth, the plan before Congress can be altered accordingly. This delay might just save the American taxpayer hundreds of billions of dollars and give investors all around the world a genuine reason for optimism.

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