19 Sep 2008

World markets still jittery despite AIG bailout

6:44 am on 19 September 2008

Global markets continued to see-saw after the Federal Reserve's massive bailout of insurance giant AIG failed to calm a crisis of confidence, leaving banks scared to lend to each other.

Shares in the United States plunged again and the Dow Jones slid 4% to close at a three-year low on Wednesday.

The US government admitted on Wednesday it is still concerned about the stability of other big financial companies. White House spokesperson Dana Perino said the Treasury is working to see if it can stem other losses, but it will take time.

It has been a tumultuous week on world markets, with significant changes in the financial landscape and trade is likely to remain rocky. Investors have been unnerved by recent dramatic events, including the demise of US investment bank Lehman Brothers and the near collapse of American Insurance Group.

Rattled investors worried about who could be the next victim of the global credit crisis, prompting them to dump financial shares across the board. The sell-off drove all three major US stock indexes down by the close of trade on Wednesday.

Shares of the two remaining independent US investment banks, Morgan Stanley and Goldman Sachs, both fell sharply despite both reporting better-than-expected quarterly earnings.

On Wall Street, the Dow Jones closed at a three year low, sliding 449 points, or 4% to 10,609.66. After a nosedive on Monday, the Dow is now down more than 7% for the week, and has fallen more than 25% since reaching a record close of 14,164.53 on 9 October.

Markets in Europe also closed lower, with Britain's FTSE-100 falling 2.2% and the FTSEurofirst 300 index of top European down 2%. Russia's stock exchange suspended trade following steep falls in shares.

Meanwhile, in Britain, the UK's biggest mortgage lender has been taken over by one of its rivals.

In a deal facilitated by the Prime Minister, Gordon Brown, Lloyds/TSB has agreed to take over Halifax Bank of Scotland, or HBOS, whose shares had taken a battering on the stock market.

There'd been concerns that HBOS was over-exposed to the slowdown in the British and American housing markets.

The deal will cost Lloyds more than $30 billion and the resulting bank will hold a third of Britain's savings and mortgage accounts.

New Zealand market down

The New Zealand sharemarket was down 119 points or 3.5%, to 3,158 at close of business on Thursday.

Australian stocks are at their lowest level since December 2005, down 2.43% at close on Thursday.

The All Ordinaries index had dropped 167 points to 4,603.

The banks have been the hardest hit. The National Australia Bank had fallen more than 8% to its lowest level since 2000.

Shares in Asia had a mixed session on Wednesday. Stocks in Taipei and Seoul all rose, although prices in Hong Kong, Shanghai lost ground.

In Japan, the Nikkei-225 index slipped 374.22 points or 3.18% to 11,375.57 by the end of the morning session on Thursday.

The US Federal Reserve on Wednesday announced it would hold its key benchmark interest rate steady at 2%, opting for the time being to soothe rattled financial markets with central bank lending facilities rather than rate cuts.

Central banks have pumped funds into money markets, following the Lehman collapse, including $US50 billion from the Federal Reserve, Stg 20 billion from the Bank of England and 70 billion euros from the European Central Bank.

United Nations' concern

The United Nations secretary general Ban Ki-Moon says the financial turmoil in the Unied States may affect the UN's ability to reduce hunger and poverty worldwide.

The UN has set itself Millenium Development Goals that include halving hunger and poverty by 2015.

But the global food crisis, and the unfolding events on Wall Street and elsewhere are threatening progress.

Mr Ban has called a meeting of world leaders to discuss the issue next week at the UN General Assembly.

Financial institutions bailed out

US central bank the Federal Reserve said on Wednesday it would lend up to $US85 billion to troubled insurer AIG. There had been fears the country's largest insurer would collapse if it did not raise the money by Wednesday.

The Fed says the rescue package is intended to save AIG from a disorderly failure that could damage the global economy. The US government will take an 80% stake in the firm.

The AIG bailout follows the collapse of Lehman Brothers, which had incurred billions of dollars of losses from the failing US mortgage market. News it was filing for bankruptcy protection caused share prices to plummet worldwide. British bank Barclays has snapped up key Lehman assets.

Another US investment bank, Merrill Lynch, has been sold off to Bank of America.