US stocks plummet amid credit crisis
United States stocks were in a dramatic sell-off on Monday morning amid a widening credit crisis, as bank failures and takeovers threatened to erode the confidence of investors.
Within 10 minutes of the opening bell, the blue-chip Dow Jones Industrial Average fell 300 points and the broader Standard & Poor’s 500 Index was down more than 3%.
Asian and European stocks took significant nosedives earlier in the day.
The market action came as Lehman, unable to find a buyer during emergency weekend talks, filed for bankruptcy protection and rival Merrill Lynch rushed into a deal to sell itself to Bank of America for $50-billion.
“Wall Street is reeling this morning,” said Chris Lafakis at Economy.com. “Today will be difficult for equities as markets digest the events that unfolded over the weekend.”
In Asia, Taiwan’s stocks shed 4,09%, and India’s two main bourses fell sharply.
The 30-share-sensitive Sensex, which lost nearly 945 points in the past four trading sessions, fell by another 469,54 points, or 3,35%, to close at 13 531,27.
In South Africa, the JSE remained in the red at midday on Monday as financial and banking stocks continued to fall while markets remained under pressure from negative sentiment.
“Markets are still down on the negative sentiment from overseas,” a local trader said.
At 11.55am, the all-share index was 2,53% lower. The rand continued to weaken and was bid at R8,13 to the dollar from R8,06 when the JSE closed on Friday.
No ‘golden parachutes’
Meanwhile, the federal government will not pay the ousted chief executives of mortgage finance companies Fannie Mae and Freddie Mac up to $24-million in exit packages.
The Federal Housing Finance Agency notified former Fannie Mae CEO Daniel Mudd and former Freddie Mac CEO Richard Syron that such “golden parachute” payments will not be paid. The housing agency, which took control over the companies earlier this month, made the announcement on Sunday.
“It would have been unconscionable to award these inflated salaries, particularly when the leadership of Fannie and Freddie can hardly be given good grades,” Senator Charles Schumer said in a statement.
Herbert Allison was named the new chief executive of Fannie, and David Moffett the new CEO of Freddie as part of the government’s bailout of the two huge mortgage financing agencies. Fannie and Freddie own or guarantee about $5-trillion of the nation’s outstanding mortgages, roughly half the nation’s total.
Meanwhile, oil plunged by $5 on Monday as investors fled to safer havens due to the turmoil in the US financial system and on early signs Hurricane Ike had spared key US energy infrastructure.
US crude dropped $5,13 to $96,05 barrel at 1.38pm GMT, after hitting a seven-month low of $94,13 earlier.
US oil fell below $100 briefly on Friday for the first time since early April, and trade was open for a special session on Sunday due to Ike.
London Brent crude fell by $5,26 to $92,32 a barrel.
Lehman Brothers’ filing for bankruptcy protection and Bank of America’s agreement to buy Merrill Lynch stirred concerns that mounting global economic problems would slow energy demand further, sending investors out of oil.
In addition, Insurer American International Group has made an unprecedented approach to the Federal Reserve seeking $40-billion in short-term financing, the New York Times said.
Oil companies rushed to check damage to their facilities after Hurricane Ike struck the heart of the US energy industry near Houston on Saturday, leaving one-quarter of the nation’s oil and refined fuel production idled.
Early indications showed no major damage to energy infrastructure, though several Texas refineries remained without power and in need of some repairs while Shell, the largest producer in the offshore Gulf of Mexico, said it found moderate damage to some of its platforms.
“The sell-off is partly because Hurricane Ike hasn’t done significant structural damage to oil facilities as well as growing concerns about the economy,” said David Moore, commodities strategist for Commonwealth Bank of Australia.
“It has been quite a spectacular turn of events at Lehman and Merrill and the stresses in the financial system are sparking concerns about economic outlook and how that will weigh on global energy demand,” he said.
Chronology of a crisis
The crisis in world financial markets began when prices plummeted in the US real-estate market in the autumn of 2006. So far, it is estimated that banks worldwide have had to write down more than $500-billion in assets.
Alarm bells ring on Wall Street as two hedge funds of the New York investment bank Bear Stearns lurch to the brink of collapse because of their extensive investments in mortgage-backed securities.
A number of German banks with bad investments in the US real-estate market are caught up in the crisis, including IKB Deutsche Industriebank, Sachsen LB (Saxony State Bank), and BayernLB (Bavaria State Bank).
The British bank Northern Rock is besieged by worried savers. The British government and Bank of England guarantee the deposits, and the bank is nationalised.
Profits at the US financial giant Citigroup drop sharply. Then one large financial institution after another reports billions of dollars in writedowns and heavy losses. The CEO of US investment bank Merrill Lynch is replaced by John Thain, head of the New York Stock Exchange.
Citigroup CEO Charles Prince resigns.
The Swiss banking giant UBS reports more than $18-billion in writedowns for 2007 on account of its exposure to the reeling US real-estate market. It announces another $19-billion in writedowns in April. In the US, the Bank of America acquires Countrywide Financial in a deal that rescues the country’s biggest mortgage lender. Bear Stearns CEO James Cayne loses his job.
The US Congress approves a $150-billion spending package to stimulate the sluggish economy.
On the verge of collapse and under pressure by the Federal Reserve, the US central bank, Bear Stears is forced to accept a buyout by US investment bank JPMorgan Chase at a fire-sale price. The deal is backed by Fed loans. In Germany, Deutsche Bank reports a loss of €141-million for the first quarter of 2008, its first quarterly loss in five years.
The California mortgage lender IndyMac collapses. Troubles for US mortgage giants Fannie Mae and Freddie Mac continue to grow. Spain’s largest property developer, Martinsa-Fadesa, declares insolvency.
The US government takes over Fannie Mae and Freddie Mac. The crisis at US investment bank Lehman Brothers deepens. Stock prices of other financial institutions also fall sharply, including those of the US investment bank Merrill Lynch, the insurance giant American International Group (AIG), and Washington Mutual, the largest US savings and loan bank.
September 15 2008, “Black Monday”
Lehman Brothers files for bankruptcy, Merrill Lynch agrees to be acquired by the Bank of America, and AIG reportedly seeks a bridge loan of billions of dollars from the Federal Reserve.
—Sapa-dpa, Reuters, Sapa-AP