James Quinn – “AIG bailout fails to end panic on Wall Street”

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/17/bcnaig317.xml

AIG bailout fails to end panic on Wall Street

James Quinn | September 17, 2008

US stock markets tumbled on Wall Street as fears spread that the US government’s $85 billion (£47 billion) rescue of American International Group (AIG) will fail to put an end to the global credit crisis.

Fears that America’s central bank – the Federal Reserve – may have over-stretched itself in agreeing to bail out AIG were underlined after the US Treasury announced plans to raise $40bn to allow the Fed to “better manage their balance sheet.”

Financial markets were also unnerved by a spike in inter-bank lending rates, with the premium paid to buy dollars over a three month period rising sharply, leading to concerns that the supply of credit might be drying up in the global financial system.

The unprecedented funding package for the Fed – the $40bn issue being the first in a series of further fundraisings – came at the same time as the head of the International Monetary Fund warned of deeper troubles for the financial system.

Dominique Strauss-Kahn, head of the IMF, said there could well be more trouble in what former US Treasury Secretary Robert Rubin dubbed “the worst crisis since the 1930s”.

“The consequences for some financial institutions are still in front of us,” Mr Strauss-Kahn warned.

In New York, the leading Dow Jones index traded down as much as 399 points, or 3.5pc – hitting a three-year low at one stage –as traders rushed to sell holdings in banks and other financial companies.

Shares in Citigroup – the largest banking conglomerate in the world by assets – fell by 15pc to levels not seen in 12 years. Morgan Stanley and Goldman Sachs, the only two remaining independent investment banks on Wall Street, fell 33pc and 21pc respectively as analysts questioned whether they could continue to exist as standalone entities in the long-term.

Protestations from the banks insisted otherwise.

In London, the benchmark FTSE100 index closed down 113.20 points at 4,912.4, off 2.25pc, in spite of welcome news that mortgage and savings bank HBOS is in talks with Lloyds TSB after Prime Minsiter Gordon Brown intervened.

In Russia, trading in shares was halted amid the worst market falls since the country’s 1998 financial collapse, as the Russian Finance Ministry pledged $60bn to help support local banks.

The prevailing mood remained negative, as investors worried about who might be next to fall, in spite of AIG’s late-in-the-day rescue.

“The fear is who is next,” said John O’Brien at US trading house MKM Partners. “It almost feels like people scour the books and say who is the next likely target, and that spreads continuous fear.”

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Published in: on September 17, 2008 at 10:15 PM  Leave a Comment  

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