Saturday, October 11, 2008

Party Like It's 1929

Thursday's calamitous chain reaction on Wall Street continues this morning in Asia and Europe. In Japan, the Nikkei slumped another 9.6 percent Friday, the New York Times reports, on a perfect storm of events. Asian "investor sentiment was battered by the overnight rout on Wall Street, confirmation that Singapore has slid into recession and news of a financial-sector bankruptcy in Japan," the NYT writes. There were similarly deep plunges in Europe with markets in London, Paris, and Frankfurt all opening at least 9 percent down, the BBC writes. Back in the States, investors are still trying to make sense of the market's 20-percent drop in the past seven days. The Dow on Thursday sunk to its lowest level in five years, below 9,000, the Wall Street Journal reports, adding "the decline leaves America in one of its worst bear markets in decades, a slump that is triggering comparisons to long-running declines of the 1930s and 1970s." Market pundits say we've entered a "secular" bear market. Looking to today's open in the United States, market watchers will keep an eye on an auction scheduled today to settle the liabilities on the credit default swaps of Lehman Bros. The price tag, calculates the BBC's Robert Peston, could reach $400 billion, a sum that would add further financial strain to "banks, insurers, hedge funds and other financial institutions", oh, and the U.S. Treasury.

The turmoil in the markets and accompanying credit crisis has Britain's Prime Minister Gordon Brown calling for a globally coordinated effort to save the world's banking system. He writes in the London Times that at the upcoming G7 and IMF meetings, world leaders "must lay down the principles and the new policies for restructuring our banking and financial system all around the globe." The Brown plan to inject capital directly into banks is now being mulled in the U.S., the NYT reports. The U.K. sunk 50 billion pounds in new capital into its banks on Wednesday, "the equivalent, relative to the size of the economy, of a $500 billion program here," writes Paul Krugman in an op-ed piece in today's NYT. Perhaps the U.S. can apply for IMF aid. The Guardian reports "Dominique Strauss-Kahn, the IMF's managing director, said he had a war chest of $200 billion at his disposal, which he could make available to desperate governments within a fortnight."

The Mack attack continues—John Mack that is. Just days after fighting back against Capitol Hill, the CEO of Morgan Stanley was staring down what the NYT calls a "renewed assault in the stock market, where its share price plummeted near 26 percent." The WSJ pulls no punches, writing, "The sharks are circling closer to Morgan Stanley." Even though the bank expected a $9 billion investment boost from Mitsubishi UFJ next week, investors are spooked because the Japanese bank's "purchase price of $25 a share now is roughly double Morgan Stanley's closing stock price Thursday." Another day, another $9 billion loan from the Fed to AIG, which saw its stock price take a 25 percent battering yesterday. "The Fed had no idea the capital markets would seize up and the stock markets would keep falling; both put AIG in a severe cash bind," a person involved in the rescue talks told the WSJ. Sticking with banking turmoil, Citigroup has walked away from the Wachovia acquisition, ceding the United States' fourth largest bank to Wells Fargo. Citi's rationale? It was worried "about the quality of some of Wachovia's assets."
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"Can GM make it?" That's the blunt headline of a Business Week piece assessing the auto giant's survival on a day when its stock fell 30 percent and its "market cap stood below what it was in 1929 and down more than 94 percent from its 2000 peak of $52.4 billion." GM is not alone; shares in Ford fell 21.8 percent yesterday as both companies were battered by a "dire new forecast for global vehicle sales," writes the NYT. Leading auto-industry analysts J. D. Power & Associates "cut its forecast for United States sales this year to 13.6 million vehicles, a 16 percent decline from last year’s total, and it said 2009 sales could fall as low as 13.2 million." Certainly oil traders have little confidence in the near future for the auto or any other industry for that matter. Crude oil dropped to $82 a barrel yesterday.

And, the Icelandic contagion continues to spread. In a remarkable lesson in just how deep this crisis has infiltrated every part of the economy, the Guardian reports that more than 100 community councils, charities, and police forces in Britain have 1 billion pounds tied up in collapsed Icelandic banks. Iceland, teetering on the brink of a "national bankruptcy," refuses to honor overseas deposits, creating a nasty diplomatic spat between Britain and Iceland. The U.K. responded by invoking its anti-terror laws to freeze U.K.-based assets of the latest failed Icelandic bank Landsbanki, the BBC reports. The last time relations were so cold between the two countries was the "cod wars" of the early 1970s, the FT reports, when an Icelandic gunboat sunk British fishing trawlers in the North Atlantic.

Finally, as the world scrambles to put some perspective on the financial meltdown, consider this new green economic report commissioned by the European Union that claims "the global economy is losing more money from the disappearance of forests than through the current banking crisis," as the BBC describes it. The annual cost of forest loss? Somewhere between $2 trillion and $5 trillion.

By Bernhard Warner and Matthew Yeomans Posted Friday, October 10, 2008

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