/ 18 September 2008

World finance firestorm outpaces firefighters

Morgan Stanley became the next great Wall Street name in peril on Thursday with reports it was in talks to be bought by Wachovia Corporation or even the Chinese, as HBOS bank was bailed out in London.

With the flames of the financial crisis outrunning renewed central bank intervention and the nationalisation of United States insurance titan AIG, US media reports, meanwhile, said Morgan Stanley was looking for help.

The latest US drama was unfolding against a background of plummeting global stocks and yields, or interest rates, on US Treasury bonds as investors rushed for the safety of government debt instruments.

The Bank of Japan made the latest of a series of interventions to support the Japanese banking system, pouring in the equivalent of $23,9-billion, and the Russian stock market was closed even before trading opened, marking the third closure in three days.

The reports in New York said Morgan Stanley, one of the last two independent US-based investment banks, was negotiating a merger with another firm.

In London, the Halifax Bank of Scotland (HBOS) became the latest victim of the firestorm when British bank Lloyds TSB said it was acquiring this leading British mortgager in an all-share deal worth £12,2-billion.

The bail-out came after HBOS stocks had plummeted in wild trading on Wednesday.

The New York Times reported that Morgan Stanley was in talks to merge with Wachovia Corporation. Separately, CNBC business network said that the bank was in talks to be bought by the Chinese bank CITIC.

Fears mounted that the US Federal Reserve’s $85-billion loan to rescue American International Group (AIG) might not be sufficient to reverse a rout on financial markets.

The White House said on Wednesday that recent US economic news painted a “very mixed picture” but added that the US had “the strength” to overcome the current financial crisis.

The bail-out for AIG, one of the world’s biggest insurers, and the earlier reports that HBOS was in advanced talks with Lloyds TSB, had initially cheered Asian and European exchanges.

Worries about British bank HBOS and US thrift Washington Mutual had dragged down stocks around the globe on Wednesday.

HBOS shares were down 19,2% at the close of trading Wednesday, against the backdrop of the dramatic collapse of US investment bank Lehman Brothers.

Nervous traders
But markets quickly reversed course as around the world, nervous traders flocked to gold and oil and made an unprecedented rush to short-term US Treasury bills, pushing yields down to their lowest levels since 1954 for what is normally seen as the safest of securities.

Aaron Smith at Economy.com called the action “an unprecedented flight to quality”, adding: “Investor concern is also growing about the Fed’s ability to support markets in the future as the central bank’s own balance sheet is reduced.”

The US Treasury announced it would sell $40-billion in 35-day bonds to help the Federal Reserve as it battles to shore up the struggling economy.

The Dow Jones Industrial Average slid 4,06% in the second massive loss in three sessions. In London, the FTSE 100 index tumbled 2,25% to 4 912,40.

Markets were turbulent as they digested the AIG rescue amid anxiety about the state of the world financial system following the dramatic collapse on Monday of US investment bank Lehman Brothers and the sale of Merrill Lynch to Bank of America.

The US government got a 79,9% stake in AIG in return for the $85-billionn, which followed hard on the heels of its takeover of US mortgage giants Fannie Mae and Freddie Mac.

The Fed said it acted because “a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance”.

The size and scope of the Fed intervention also triggered political controversy in the United States.

Some analysts said the action orchestrated by Fed chairperson Ben Bernanke with the blessing of Treasury Secretary Henry Paulson pushes the government further toward nationalisation.

“The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America’s once-vaunted free-market economy,” said Peter Schiff, president of Euro Pacific Capital.

“Since there is no limit to the amount of money the Fed can create, there is no limit to the number of assets they can acquire.”

In Paris, French Finance Minister Christine Lagarde said this week’s dramatic developments heralded a major reconfiguration.

“We are seeing a transformation of financial markets, of the role of people in finance and of bodies overseeing finance,” she told France 24 television. — AFP