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In the first hour of trading on Wall Street, the Dow slid 41.85, or 0.38 percent, to 10,875.66 but by lunch it had clawed back those losses and was trading 0.1 percent higher. Other key U.S markets were also up but by less than 0.2 percent.
And the U.S. Federal Reserve kept a key interest rate which impacts consumer repyament steady at at 2 percent Tuesday.
In Asia, Japan's Nikkei index fell 4.9 percent and Hong Kong's Hang Seng Index fell to its lowest point in nearly two years when it dropped by 5.5 percent. A leading indicator of stock values in
At the close in Europe,
Key bank stocks were again hit sharply, with HBOS down about 21 percent and Royal Bank of
Earlier Tuesday, European central banks pumped billions more in short-term credit into the financial system for a second day to shore up confidence in the aftermath of the collapse of 
The European Central Bank launched its second one-day refinancing operation in as many days, offering up a 4.25 percent bid rate. On Monday, it added $42.5 billion to money markets though banks had oversubscribed the offer by three times to $127.8 billion.
In
Across
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The Bank of Japan injected 2.5 trillion yen ($24 billion) into money markets Tuesday, while
The venerable Lehman Brothers investment bank announced Monday it would file for bankruptcy despite frantic efforts to save it.
British bank Barclays had been engaged in negotiations about a possible takeover of Lehman but pulled out over the weekend.
However, Barclays revealed in a statement early Tuesday that it was interested in acquiring some Lehman assets.
Elsewhere, fellow New York-based investment bank Goldman Sachs reported a sharp decline in profits that beat Wall Street's forecasts. But revenues missed analysts' estimates and the stock fell in pre-market trading.
Don't Miss
- Barclays eye key Lehman assets
- Bank of Japan pumps $24B into money markets
- Oil prices plunge on credit fears
- CNN/Money: Goldman Sachs reports big profit plunge
- CNN/Money: AIG's cash hunt in high gear
- Financial turmoil as top bank collapses
The bank said its profits fell more than 70 percent to $845 million, or $1.81 a share, during the third quarter ending in August. Just a year ago, the company reported a profit of $2.85 billion, or $6.13 a share. Wall Street was expecting a profit of $1.71 a share.
Meanwhile, the Bank of America bought another Wall Street fixture -- Merrill Lynch -- in an all-stock deal worth $50 billion.
The financial squeeze was being felt in other sectors Tuesday, as shares in the
As a result of the dramatic developments at Lehman Brothers, the Dow Jones industrial average lost 504 points, or 4.4 percent, on Monday. It was the biggest one-day decline for the Dow on a point basis since September 17, 2001, when the market reopened for trading after having been closed in the aftermath of the September 11, 2001 terrorist attacks. On a percentage basis, it was the biggest decline since July 19, 2002.
The Standard & Poor's 500 index lost 4.7 percent, its worst day since September 17, 2001, when it plunged 4.9 percent. The S&P 500 also closed at its lowest point since October 27, 2005.
The Nasdaq composite lost 3.6 percent, its worst single-session percentage decline since March 24, 2003. It left the tech-fueled average at its lowest point since March 17 of this year.
"It was an ugly day," said James King, president and chief investment officer at National Penn Investors Trust Company. "Lehman's failure to find a suitor and Merrill deciding to cash in their chips before a similar fate could befall them really stoked the fears of the public."
Early trading raised concerns in
"It has been a very rough ride here in
A major worry, she said, is that export-driven economies, such as the ones in
"The impact here is going to be extreme if
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After sliding about 150 points, the Dow Jones Industrial Average [$INDU] pulled into positive territory before lapsing again after the Fed's announcement, only to rise again on the latest AIG report by Bloomberg News.
"The spike was just off Bloomberg's report that the government may provide a loan to AIG. Whether the Fed cuts or not is totally irrelevant," said Peter Boockvar, equity strategist at Miller Tabak.
The blue-chip index was last up 75.07 points to 10,992.58.
After lapsing to a low of $1.25 a share earlier on, AIG [AIG] , was recently trading at $4.06 a share, down 70 cents, or 13.2%.
The giant insurer late Monday was downgraded by four ratings agencies, which AIG had previously estimated could lead counterparties to demand another $14.5 billion in collateral.
The S&P 500 [$SPX] gained 12.25 points to 1,204.95, while the Nasdaq Composite [COMP] climbed 13.65 points to 2,193.56.
The stock indexes had reverted to sharp losses after the Federal Reserve opted to leave its benchmark lending rate unchanged, leaving investors to mull the fate of AIG.
Holding its fed funds rate steady at 2.0%, the central bank's statement expressed concern about the economy, while moderating its worry over inflation.
The fear and uncertainty underlying the market will persist until the outcome at AIG is known, rendering the Federal Reserve's pending interest rate decision of little importance, said Marino Marin, managing director at Gruppo, Levey & Co. "It's not that relevant at this point whether they [central bankers] cut or not."
"It's the end of the world as we know it. We're now dealing with a problem that is probably much larger than we think. There is $1 trillion of assets in AIG. It's much bigger and much more profound than a broker dealer in
Financials and consumer discretionary led sector gains on the S&P, with Merrill Lynch & Co. Inc. up 18.4% in the wake of its deal to be acquired by Bank of America Corp. [BAC]
In the worst single-day point plunge since the Sept. 11, 2001, attacks, the Dow Jones Industrial Average on Monday plunged 504 points, as Lehman Brothers Holdings Inc. [LEH] filed for bankruptcy protection and Merrill Lynch Co. Inc. [MER] hastily reached a deal to be purchased by Bank of America Corp. [BAC] .
Asian markets, several of which were closed on Monday, dropped sharply, with the Nikkei 225 losing 5% in
The dollar index, which measures the
On the New York Mercantile Exchange, oil futures fell sharply, losing $3.91 to $91.8 a barrel. .
Financials in distress
The New York Fed announced a large overnight repurchase agreement, saying it would inject billions of dollars into the financial system and is prepared to add additional funds later in the day if necessary. However, the market seemingly found little comfort in the move.
Shares of Goldman rival Morgan Stanley [MS] , which is slated to report on Wednesday, declined 17%.
Another financial in distress, Washington Mutual Inc. [WM] , saw its credit ratings downgraded by Standard & Poor's.
U.K. bank Barclays PLC [BCS] said it's in talks to buy some Lehman assets.
Outside of financials, Dell [DELL] warned of further softening in information technology demand.
Hewlett-Packard Co. [HPQ] said it would cut nearly 25,000 jobs over the next three years and take a $2 billion charge as it meshes its operations with Electronic Data Systems.
European stocks end with second day of big losses
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LONDON (MarketWatch) -- European shares ended Tuesday at a three-year closing low as selling continued in the financial sector after Lehman Brothers bankruptcy and the troubled conditions for insurance giant American International Group.
The pan-European Dow Jones Stoxx 600 index dropped 2.6% to 263.55 with financials performing poorly again, and energy stocks also selling off on the decline in oil prices.
The U.K. FTSE 100 index briefly succumbed to the 5,000 mark before finishing down 3.4% to 5,025.60.
The German DAX 30 index fell 1.6% to 5,965.17 and the French CAC-40 index fell 2% to 4,087.40.
The Russian RTS index slumped 11.5% to 1,131.12, bringing three-month losses to 52%, prompting Russian Prime Minister Vladimir Putin to say the country could withstand the market turmoil.
A month ago, the Fed signaled strongly that its next move would be to raise interest rates, not cut them. But that was before the seizure of Fannie Mae and Freddie Mac, before the extraordinary collapse of Lehman Bros. early Monday, before the weekend fire sale of Merrill Lynch.
"The market is hoping that maybe with the Federal Reserve meeting today there might be a 25 to 50 basis point interest rate cut. Futures are discounting a 70% chance that there will be a 25 basis point rate cut," said Philippe Gijsels, senior strategist at Fortis Bank.
HBOS leads bank selloff
Shares of leading U.K. mortgage lender HBOS dropped 21.7% as investors fretted about the company's ability to fund its lending after ratings agency downgrades for U.S. insurance giant AIG and a sharp drop profit at Goldman Sachs Tuesday added to over a week of dire news from the U.S. financial sector and renewed tensions in the money markets.
HBOS attempted to calm fears about its financial strength on Tuesday, saying in a statement that it remains strong, with more deposits and a higher capital ratio than any other major
"At the moment, every dollar of profit that financials make is going to providing a buffer against the possibility that tomorrow a particular financial institution may find itself in the crosshairs of market sentiment," noted John Haynes, senior equity strategist at Rensburg Sheppards.
Worries that banks will have to take further asset write downs and may be exposed to counterparty risk from Lehman weighed on other financials in Europe, with UBS [UBS] , the Swiss giant that's had to take the largest write-offs of any European bank, down 17.2%. The lender said its exposure to Lehman Brothers won't be over $300 million.
Shares in insurer Aegon [AEG] fell 7.2% after it said it has around 265 million euros ($376 million) of fixed income exposure to Lehman Brothers but doesn't hold any common equity in the failed firm.
Aviva , which says it doesn't expect to make a write-down from Lehman, fell 6.5%.
Shares of Songbird Estates , the owner of
Barclays said on Monday that it had ended talks to buy the entire firm.
Outside of financials, shares of Volkswagen rallied 9.4%. Porsche upped its stake in VW to 35.1% and reiterated a plan to buy a majority stake. Based on an average attendance at shareholder meetings, Porsche says it will have a voting majority in
Shares in Porsche fell 1.8%
Crude futures drop almost 5%, but hold above $90OPEC cuts demand view; prices rise on Globex as
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Crude oil for October delivery closed at $91.15 per barrel on the New York Mercantile Exchange, down $4.56, or 4.8%. The contract already dropped 5.4% on Monday.
October crude fell to a low of $90.51 per barrel Tuesday in electronic trading on Globex, oil's weakest intraday level since early February.
Prices were moving higher as of 3:30 p.m. EDT, trading at $93.The Fed decision was bullish for the U.S. dollar, as well as anti-inflationary, so it 'could keep investment buying out of commodities.'
Darin Newsom, DTN
Other energy futures fell during the regular trading session. October natural-gas futures closed down 9.5 cents, or 1.3%, at $7.279 per million British thermal units.
It's "more of the same -- weak fundamentals and continued long-liquidation," said Darin Newsom, DTN senior analyst.
But this market could find support from commercial buying at any time, he said.
On
On Monday, oil prices joined the stampede downward in the financial markets as "investors shifted capital to anything with a degree of safety," said Simon Wardell, an oil analyst at Global Insight.
"With the outlook for the global economy deteriorating by the day, commodity investors are no longer confident that demand, even from emerging economies, will be enough to stem a looming surplus of oil in the market," he said in a note to clients.
On Monday, oil futures fell $5.47 to close at $95.71 a barrel on Nymex.
Demand cut
Meanwhile, "OPEC is now projecting decreased world demand due to economic problems."
World oil demand growth in 2008 has been revised down by 100,000 barrels a day and expected to grow by 900,000 barrels to average 86.8 million barrels a day, the Organization of the Petroleum Exporting Countries said in a monthly report issued Tuesday.
OPEC cited "an unexpectedly strong decline in oil demand in
OPEC also expects world oil demand to grow by 900,000 barrels per day to an average of 87.7 million barrels per day in 2009. The forecast was unchanged from the previous report.
Taking a look at the bigger picture, "clearly right now it's a bearish market," said Mike Wittner, global head of oil research for Societe Generale in
Wittner, however, said September is likely to represent the low for oil.
"I think part of what's going on is that there's seasonal weakness because of planned refinery maintenance. The runs start to go up before the winter, that means the refineries should start to pick up their buying," Wittner said.
He also said non-OECD demand is holding up and that supplies will be an issue. Wittner was referring to the Organization for Economic Co-operation and Development, a group of industrialized nations.
"Despite the mixed signals coming from the Saudis after the OPEC meeting, we're $10 a barrel lower than where we were," he said. "The Saudis will start cutting sooner or later, probably sooner than later."
Following the meeting however, a Saudi official told the media that
Storm disruptions
"While the outlook for the global economy has undoubtedly deteriorated, the market is largely ignoring actual supply disruptions in the
Hurricane Ike passed through the
Damage reports indicate that it may be days, if not weeks, before full supply is resumed, said Wardell. "As far as oil output is concerned, this is problematic, but not disastrous."
But "the disruption to 16 refineries in the region, with a combined capacity of over 4.2 million b/d, is causing problems," he said. And "With gasoline inventories already low thanks to very weak margins and minimal refinery throughputs, many states will suffer gasoline shortages."
"The outage will also have a lasting impact on the refined product sector through the coming six months, though the extent of that impact is hard to gauge at present," he said.
Valero Energy [VLO] said Tuesday that power has been restored to most production units at the Valero Houston Refinery and the Valero Texas City Refinery. Valero is working to restore power at its
Chevron Corp. [CVX] said Monday that there are indications that some platforms have been affected by Ike, with some toppled in the eastern and western shelf areas.
Against this backdrop, the average U.S. retail price for a gallon of regular gasoline climbed to $3.854 Tuesday, up from $3.842 Monday, and above the month-ago price of $3.751, according to AAA's Daily Fuel Gauge Report.
But prices for petroleum prices followed oil lower Tuesday on Nymex. October reformulated gasoline closed down 16.1 cents, or 6.3%, at $2.4008 a gallon and October heating oil dropped 7.2 cents to end at $2.7197 a gallon.
Data views
The U.S. Energy Department will release its weekly update on petroleum supplies Wednesday morning and an update on natural-gas supplies in storage on Thursday morning.
On average, industry analysts surveyed by Platts expect the Wednesday report to show that crude supplies fell by 3.7 million barrels for the week ended Sept. 12, distillates fell by 1.7 million and motor gasoline inventories fell by 3.6 million barrels.
"A combination of lower imports as the Louisiana Offshore Oil Platform and the Houston Ship Channel closed ahead of the arrival of Hurricane Ike, as well as oil production in the Gulf of Mexico that remained shut-in after Hurricane Gustav, will result in another week of sharp stock declines," said Linda Rafield, Platts senior oil analyst, in a note to clients.
Global Insight expects the Energy Department report on Thursday to show an increase of 50 billion cubic feet in natural-gas supplies in storage for last week.
Losses in the energy market Tuesday helped push a key index for commodities lower. The Reuters/Jefferies CRB Index [CRB] , a benchmark gauging the prices of major commodities, fell by 2.1%.
Treasurys fall after Fed keeps rates steady
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Two-year Treasury yields, which move inversely to price, [UST2YR] rose 17 basis points, or 0.17%, to 1.88%.
Policy makers noted concern about the economy but that actions taken to date should help promote growth.
Analysts had earlier said that the
The Fed also indicated its ongoing measures to foster liquidity should help promote growth and counterbalance the crisis of confidence surrounding so many financial institutions today.
"The Fed is determined to take on the problem by widening the scope of its liquidity programs rather than lowering interest rates," said Andrew Richman, who helps oversee $10 billion in fixed income for SunTrust's private-wealth-management group. "The bond market is selling off here because of expectations that were there."
Traders pared bets on a rate cut at next month's meeting. Fed futures show a 60% chance the Fed will reduce its benchmark rate on Oct. 31 to 1.75%. Before the decision, the market priced in a second cut in addition to one today, possible for as much as a half percentage point.
"They are keeping their rate cut 'powder dry' should the downside risks to growth develop," said T.J. Marta, fixed income strategist at RBC Capital Markets.
Ten-year yields rose [UST10Y] 9 basis points to 3.28%.
The New York Fed on Tuesday added $50 billion in liquidity to money markets through overnight repurchase agreements, known as repos. That matched Monday's injection as the largest single operation since the aftermath of the Sept. 11, 2001, terrorist attacks.
The central bank does a repo operation on almost every business day to meet demand from banks and primary dealers. The Fed added another $20 billion in its typical 28-day repo.
The Federal Reserve, faced with a series of shocks to the
The
![[fed funds]](file:///C:/Users/Nora/AppData/Local/Temp/msohtml1/01/clip_image009.gif)
The central bank's policy committee voted unanimously to leave the federal funds rate, at which banks lend to each other overnight, unchanged at 2%. It was the first fully unified vote since last September.
The decision gives the Fed more time to weigh the effects of the latest round of financial turmoil on the overall economy. Officials had hoped the broader fallout from the weekend would be limited, but they are closing watching markets -- and other troubled firms -- to gauge whether credit would tighten as a result.
The Fed said it would "act as needed" based on economic and financial developments. Officials were already expecting economic growth to weaken later this year. In their statement, they said tight credit conditions, the housing-sector contraction and slowing export growth "are likely to weigh on economic growth over the next few quarters."
Still, the Fed said inflation and growth risks are both "of significant concern." The statement said "inflation has been high" and the inflation outlook "remains highly uncertain." But the committee still expects inflation to moderate later this year and next year.
![[Wall Street traders reacted after the Fed left interest rates unchanged.]](file:///C:/Users/Nora/AppData/Local/Temp/msohtml1/01/clip_image010.jpg)
The Fed went into this past weekend inclined to keep rates on hold for at least several months. While the
Sometime next year, analysts had predicted, the Fed would finally make a move -- a rate increase. But rate cuts came back on the table -- with futures markets putting strong odds on a cut Tuesday -- after a dramatic 10 days that threatened to topple the
Over the weekend, Fed and Treasury officials pushed for the sale of Lehman Brothers Holdings Inc., but the nation's fourth-largest investment bank ultimately filed for bankruptcy protection. The government, which put up $29 billion to facilitate J.P. Morgan Chase's purchase of Bear Stearns Cos. in March, this time rejected requests for taxpayer funds to help secure a sale.
At the same time, the struggling investment bank Merrill Lynch sold itself to Bank of America in a rushed weekend transaction. The series of moves, combined with fears surrounding insurance giant American International Group, rocked global financial markets.
The weekend before, top Fed officials helped coordinate the takeover of Fannie Mae and Freddie Mac. The government-chartered firms, which own or guarantee half of all
The housing turmoil sparked a global financial crisis in August 2007 when banks, fearing exposure to other firms with bad mortgage debt, grew reluctant to lend. The resulting credit crisis forced the Fed and other central banks to respond with massive cash injections into financial markets and lending programs to ease strained conditions.
Real Time Economics
- Read the latest news and analysis on the economy at WSJ.com's Real Time Economics blog.
- End of Dissent: Fisher Joins the Majority
Policymakers initially sought to alleviate the credit-market stress by making it easier for commercial banks to borrow from the Fed's discount window through lower rates. As market conditions worsened over the course of a year, the Fed engineered its broadest expansion of lending programs since the Great Depression to prevent short-term funding crises.
Six months ago, after the downfall of Bear Stearns, the central bank cited "unusual and exigent circumstances" to extend its lending to investment banks and began stationing staff inside the largest firms to monitor their conditions.
Throughout the crisis, Fed officials have sought to separate their lending function -- keeping markets operating -- from their monetary policy role of setting interest rates.
Policymakers started an aggressive effort to ease monetary policy beginning last September, when interest rates stood at 5.25%. Even before the economy showed signs of turning down, they cut rates to try to offset the threat posed by weakening financial conditions. A month later, many officials thought the financial markets might be on the road to recovery, making more rate cuts unnecessary.
But credit-market stress resurfaced and worsened, weighing on overall economic activity, and the Fed kept cutting rates. The
Once the Fed lowered its rate target to 2% in April, officials questioned whether further easing would help much. Key consumer rates, such as mortgages, stopped responding to Fed cuts because overall stress in credit markets. Some feared that easing policy would simply spur inflation problems in the long run.
They're also acutely aware of a key criticism: The Fed, by pushing its rate target down to 1% earlier this decade and keeping it there with the economy weak, may have helped fuel an unsustainable housing boom that caused the current crisis. Fed officials now insist that they must avoid keeping rates too low for too long and creating more problems down the road.
Crisis on Wall Street
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Fed holds rates at 2 per cent
The Federal Reserve kept interest rates unchanged at 2 per cent in spite of the financial hurricane raging in global markets. Its decision to hold firm against a rate cut came as financial turmoil unleashed by the failure of Lehman Brothers and fuelled by the crisis at AIG convulsed global markets for a second day as money markets froze - Sep 16 2008
AIG looks to US government for rescue
Fresh round of emergency talks - Sep 16 2008
Goldman Sachs earnings slide
Earnings below consensus estimates - Sep 16 2008
Barclays nears Lehman deal
Deal centres on US broker-dealer operations - Sep 16 2008
Asian shares fall sharply as crisis spreads
Japanese government bonds surge - Sep 16 2008
HBOS at forefront of sustained sell-off
FTSE 100 closes at new low for 2008, but keeps 5,000 mark - Sep 16 2008
Downgrades deepen AIG woes
May cost billions in collateral payments - Sep 16 2008
Wall St bankers’ woes set to bruise Big Apple
Current troubles are likely to serve a big blow to
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Comment
The end of lightly regulated finance has come far closer
Is the worst now over? Certainly not. The biggest outstanding question is whether government-led rescues of undercapitalised financial systems will be needed, writes Martin Wolf - Sep-16
Hank Greenberg: It’s in America’s interest to save AIG
The insurer faces a liquidity crisis rather than a solvency problem – it needs a bridge loan, not a bail-out - Sep-16
The last gasp of the broker-dealer
Sunday marked not only the end of Lehman Brothers and the surrender of Merrill Lynch but also the end of a banking era, writes John Gapper - Sep-15
Willem Buiter: No case for a Fed cut
Maverecon blog: A cut in the Federal Funds Target rate today would be a pointless and possibly counterproductive move, argues Willem Buiter - Nov-02
Editorial Comment
Bigger they come the harder we fall
Permitting AIG to fail to meet its commitments would be more dangerous than allowing Lehman to do so - Sep-16
Kill or cure for the Wall Street malaise
The Treasury’s calculated risk with Lehman looks better judged than those of a banking system intoxicated by bail-outs. Yet even well-judged gambles fail - Sep-15
Lex
Ailing AIG
The company’s position looks perilous. Monday’s after-market downgrades from the credit rating agencies may prove terminal - Sep-16
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Can the
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Macabre prediction game rears head again - Sep-15
Shocked Lehman staff told to ‘move on’ - Sep-15
Intensive talks failed to prevent Lehman’s demise - Sep-15
Lehman job losses hit ailing UK economy - Sep-15
BofA corrals the ‘thundering herd’ - Sep-15
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Stocks sink amid Wall St crisis - Sep-16
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AIG forms keystone of financial system - Sep-15
US stocks plummet to 3-year lows - Sep-15
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Lehman had to fall to save the financial system - Sep-15
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Lehman employees prepare for exit - Sep-15
Asian shares stumble on Lehman woes - Sep-15
Stocks volatile amid uncertainty
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Reaction from around the world
Stock markets were volatile after the collapse of the fourth-largest
The Dow Jones industrial average shed 100 points in late afternoon trade, after the Federal Reserve said it would leave interest rates unchanged at 2%.
Before the announcement the benchmark index has risen slightly.
Elsewhere leading indexes ended lower with the
Banking shares were badly hit with HBOS losing about 35% at one point.
Lehman Brothers, which may be about to sell its core assets to Barclays, became the latest victim of the global credit crunch on Monday.
Lehman's collapse has continued to reverberate:
- Central banks around the globe have pumped funds into the money markets, including $50bn (£28bn) from the US Federal Reserve, £20bn from the Bank of England and 70bn euros ($100bn; £56bn) from the European Central Bank.
- Global stock markets fell heavily for a second consecutive day.
Banks hit
The benchmark Dow Jones index had dropped some 500 points on Monday - its worst session since 11 September 2001.
The FTSE 100 index of leading
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Robert Peston, BBC business editor Lehman pension scheme in deficit Credit crunch jargon explained |
Markets in
Central banks around the world carried out emergency measures on Tuesday to keep markets liquid.
The extra funding came as the interest rates at which banks lend to each other rocketed - as they did at the start of the credit crunch. This is seen as a sign of falling confidence between the banks.
Overnight, sterling Libor increased from 5.5% to 6.8%, and the dollar Libor rate increased from 3.1% to 6.4%.
The extra £20bn (25bn euros; $36bn) put into short-term money markets by the Bank of Enlgand was "in response to conditions in the short-term money markets", it said.
The injection was four times the sum seen on Monday after Lehman's collapse
The Bank of Japan has also carried out two injections of a combined 2.5 trillion yen ($24.1bn; £13bn)
More regulation? Maybe, but more important in my judgment is using the regulation more effectively
Michael,
Bank stocks were hard hit again across Europe; in London HBOS was down by about 22%, having fallen 35% at one point, and Royal Bank of
Barclays Bank - which said it was in talks to take on some of Lehman's
In
Meanwhile, Japanese-registered Lehman Brothers Japan and Lehman Brothers Holdings have applied to the Tokyo District Court for bankruptcy protection.
'Crisis'
On the currency markets, the dollar slid to a four-month low against the yen before reversing earlier losses.
The collapse of Lehman, which had incurred billions of dollars of losses from the failing
"We're in the middle of a crisis," said YK Chan at Phillip Asset Management in
Meanwhile, there were fears that AIG, one of the world's largest insurers, could also face collapse.
The State of
'Rough spots' ahead
On Monday, US Treasury Secretary Henry Paulson said the
Henry Paulson was upbeat despite the turmoil
He said Americans could remain confident in the "soundness and resilience" of the
But he warned that uncertainty remained and it was likely that there would be further "rough spots" ahead until the correction of the
Mr Paulson said he was committed to working with regulators in the
But he gave no details of what such steps might mean.
Federal Reserve leaves interest rates alone
Wall Street had been pushing for a cut, and the Dow seesaws after the announcement. Rumors persist that the Fed may help the ailing American International Group.
By Maura Reynolds and Martin Zimmerman,
12:35 PM PDT, September 16, 2008
The Fed's inaction came despite pressure from Wall Street for easier credit to lessen the ongoing crisis, especially at faltering insurer American International Group Inc.
FINANCIAL SYSTEM IN CRISIS
Chart
· Chart: consumer price index
· Lehman Bros., Merrill Lynch employees anxious about future
· Merrill Lynch takeover is a match for Bank of America's ambitions
Investors who were hoping for a rate cut were quick to show their disappointment. Stocks prices started falling immediately after the Fed announcement, and within minutes the Dow Jones Industrial Average was down more than 100 points. The widely watched market barometer had been up about 20 points just before the announcement.
However, after seesawing wildly in the minutes after the announcement as investors digested the news, the Dow moved into positive territory and was up 116 points at 11,033 shortly after noon PDT, 45 minutes after the news broke. However, shares of investment banks Morgan Stanley and Goldman Sachs Group Inc. slumped.
Treasury Secretary Henry Paulson said Monday that the federal government wasn't planning to bail out any more Wall Street firms, as with the rescue of investment bank Bear Stearns Cos. in March.
Still, rumors were swirling this morning that the Fed might extend some sort of helping hand to AIG, especially after efforts at putting together a privately funded rescue package apparently fell apart.
Rescue options for AIG were the focus of intense discussions in
Yields on Treasury securities jumped after the Fed held its key rate steady. The 10-year Treasury note yield, a benchmark for mortgage rates, rose to 3.48% from 3.39% on Monday. Treasury yields had tumbled in recent days as many investors sought havens and as some bet that the Fed would ease credit.
Mark Zandi, chief economist at Moody's Economy.com, said the Fed was right to keep rates where they are because with the markets nearly paralyzed, it's not clear a rate cut would have much effect. But he said a rate cut is only a matter of time.
"Ultimately, they will have to ease probably by the end of the year," Zandi said. "The economy is weakening and will weaken further because of the recent turmoil and they will have a green light because inflation is lower."
The crisis on Wall Street has thrown stock and bond markets into upheaval. The Dow fell 504 points Monday after investment bank Lehman Bros. Holdings Inc. filed for bankruptcy protection and American International Group, the world's largest insurer, faced a severe cash crunch.
In recent days, banks frightened by the possible collapse of AIG, which insures billions of dollars of Wall Street deals, have begun to hoard their reserves, deepening the credit crunch and intensifying the risk AIG could crumble. The spread between the Fed rate of 2% and the rate banks charge each other has widened to as much 5 percentage points.
"It's a disappointment to me because they aren't providing a needed offset," said Diane Swonk, chief economist at Mesirow Financial in
But in a carefully worded statement, the Fed signaled that it remains as worried about inflation as it does about economic growth and would continue to address the financial markets problems by providing cash and liquidity by other means.
"Tight credit conditions, the ongoing housing contraction, and some sowing in export growth are likely to weigh on economic growth over the next few quarters," the Fed said. "Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
"The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee," the Fed said.
In recent months, the Fed has begun to rely less on its interest rates and more on new lending facilities to help banks and other financial institutions that find themselves short of reserves. The Fed now lends to a wide variety of financial institutions and accepts a wide variety of collateral for its loans.
That practice continued today when the Federal Reserve Bank of
The Fed action followed a good report card on inflation released earlier in the day. After months of heating up, consumer prices cooled slightly in August, declining 0.1% as prices for gasoline and other fuel fell off their mid-summer highs, the government reported today. Excluding food and energy costs, consumer prices rose by a slight 0.2%.
The Federal Reserve tends to pay close attention to the "core" rate of inflation on goods other than food and fuel, and it has been on a slow, steady climb for much of the year.
Over the last 12 months, consumer prices have climbed 5.4%, the Labor Department reported. Excluding food and energy, prices are up 2.5% over the last year-above the Federal Reserve's target rate of 2%. Oil prices are down another 5% today and have fallen more than a third from their summer highs.
"The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain," the Fed said in its statement.
The New York Times
Related
Markets Accept Fed Decision (September 17, 2008)
Text: Fed Statement
Q & A: How Market Turmoil Affects Consumers
Video: Fed Keeps Interest Rates Steady
While the Fed acknowledged that “strains in financial markets have increased significantly and labor markets have weakened further,” it went on to note that “inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities.”
“The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain,” the Fed statement said. The decision of the Fed board was unanimous.
Tuesday’s decision seemed to go against the prevailing sentiment on the Wall Street, which had been angling for a quarter point cut since the weekend when Merrill Lynch was acquired by Bank of America, Lehman Brothers was forced to file for bankruptcy and the American International Group struggled to find at least $75 billion in financing to remain afloat.
Investors on Wall Street reacted immediately, sending shares down more than 100 points, but turned quickly and was up about 60 points about 25 minutes after the decision.
“The FOMC has decided to stand pat despite the market turmoil,” Sung Won Sohn, an economist at California State University, Channel Islands, who studies financial markets. “Lower interest rate at this time would not solve any problems in the financial markets. The market is not short of liquidity; it is short of confidence.”
As Fed policy makers began their meeting Tuesday morning, global financial markets were enduring a second day of turmoil. Asian stock markets, most of which had been closed on Monday, had plunged 4 to 6 percent as they absorbed the weekend shocks involving the investment banks Lehman Brothers and Merrill Lynch, and the insurance giant, the American International Group.
On Friday, when it seemed likely that Federal officials would orchestrate some kind of shotgun marriage for Lehman Brothers, investors had assumed that the Fed would leave its benchmark rate unchanged at 2 percent.
The Fed chairman, Ben S. Bernanke, had sent out a steady stream of cautionary warnings that inflationary pressures remained a concern. The overnight federal funds rate was already lower than the inflation rate, which meant that the “real” rate was below zero after adjusting for inflation.
The Treasury Department’s bailout of Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies, promised to provide additional relief. That move, which reduced anxiety about mortgage securities that Fannie and Freddie had guaranteed, had reduced the yields that investors were demanding on the securities and seemed likely to reduce the cost of mortgage borrowing.
Fed officials had already lowered rates on the assumption that economic growth would slow to a crawl in the last few months of the year, so it did not seem likely that they would reduce rates again when the slowdown appeared. But the turmoil of the last couple of days raised the possibility that the Fed’s gloomy forecast might be too optimistic and that it would have to take additional action.
By any measure, the economy has already slowed sharply. The United States lost an average of 75,000 jobs a month since January, for a total loss of 605,000 jobs through August. The unemployment rate hit 6.1 percent last month, up from 4.9 percent in January.
Some sectors, especially exports, have been surprisingly strong. Exports have gotten a lift from the dollar’s sharp drop against other currencies, which makes American products cheaper overseas, and from healthy growth in other parts of the world.
But most forecasters predict that the export boom will fade as slower growth in the United States spills into foreign markets.
Meanwhile, the United States economy faces a pounding from the continued weakness in the housing market and the huge losses in financial markets.
The collapse of the mortgage market will probably extend the credit squeeze, for two separate but mutually reinforcing reasons.
The first is that banks and investors have already been forced to significantly tighten their lending standards. Subprime mortgages and other high-risk loans, which accounted for almost a third of new mortgages in 2006, have all but disappeared and are unlikely to return any time soon.
The second reason is that banks and financial institutions now have to repair the holes in their balance sheets. That is a process that could take years, and could be even more difficult if foreign investors, including foreign central banks, become more wary of financing America’s huge foreign debt.
Traditionally, the Federal Reserve has been reluctant to change interest rates just before an election, because officials do not want to invite accusations of trying to influence political outcomes.
Fed leaves rates unchanged
Central bank disappoints investors who hoped it would respond to financial market woes with another rate cut but market rallies on the news anyway.
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By Chris Isidore, CNNMoney.com senior writer
Last Updated: September 16, 2008: 4:12 PM EDT
NEW YORK (CNNMoney.com) -- The Federal Reserve left its fed funds rate at 2% Tuesday despite increased hopes for a rate cut.
Wall Street wanted a cut in order to help ease the pain in the financial sector and restore investor confidence.
The Fed's policymakers acknowledged the deepening problems facing the nation's financial markets as well as weaker economic fundamentals in its statement.
"Strains in financial markets have increased significantly and labor markets have weakened further," said the statement, making reference to the jump in unemployment to a five-year high of 6.1% in August. It also warned that softer spending by consumers is expected to slow economic growth.
But the Fed added that it believes rates are already low enough to spur future economic growth and that despite recent declines in commodity prices, such as oil, the outlook for inflation remains uncertain.
The fed funds rate is the central bank's key tool to affect the economy. Lowering the rate pumps money into the economy by reducing the cost on a broad range of loans, including credit cards, home equity lines and many business loans.
Stocks initially fell on the announcement but bounced back and were higher in late afternoon trading even though expectations had grown in recent days that the Fed would respond to market turmoil by lowering rates.
According to futures contracts listed on the Chicago Board Trade, investors were betting Tuesday morning that a rate cut of at least a quarter-of-a-percentage point was almost certain.
The Fed and AIG
Also lifting stocks were wire service reports that the Fed was considering loaning tens of billions to American International Group (AIG, Fortune 500), the nation's largest insurer and a key player in the financial markets. The Fed was said earlier to have reservations about lending to AIG but that may be changing.
AIG's scramble for cash this week is just the latest of the problems roiling the nation's financial markets.
In the past nine days, the Treasury Department took control of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), investment bank Lehman Brothers (LEH, Fortune 500) filed for bankruptcy and Merrill Lynch (MER, Fortune 500) agreed to a buyout by Bank of America (BAC, Fortune 500).
In addition, shares of Washington Mutual (WM, Fortune 500), the nation's largest savings and loan, have plunged due to growing concerns that it too would have trouble raising necessary capital.
Keith Hembre, chief economist for First American Funds, said he thought a bailout of AIG made sense and that a potential rescue plan for the firm may have been one of the factors that stopped the Fed from cutting rates.
"If they were about to do an about face on AIG, that was probably a consideration on the rates," he said.
A Fed spokesman would not comment on the AIG report. But one possible indication of the Fed's involvement in any AIG discussions is that New York Federal Reserve President Timothy Geithner did not attend the meeting. Christine Cumming, first vice president of the New York Fed, voted in his place.
Geithner has been widely acknowledged as the Fed's main person involved in Wall Street efforts to save struggling financial firms.
In March, the Fed agreed to guarantee $29 billion in loans so that JPMorgan Chase would buy Bear Stearns. And Geithner led this weekend's last-minute efforts to save Lehman. Those talks between regulators and top banking officials were held at the offices of the New York Fed.
The New York Fed also pumped $50 billion into the nation's financial system Tuesday in an effort to help ease credit stresses.
Bernard Baumohl of The Economic Outlook Group in Princeton Junction, N.J., said that injection is a sign that the Fed recognizes it must deal with the problems facing Wall Street, even if it kept rates unchanged.
"The Fed is in effect saying, 'I'm not going to lower rates and subsidize the loan, but we're going to give you as much money as you need to conduct your operations," said Baumohl.
K. Daniel Libby, senior portfolio manager for Sands Brothers Asset Management, said he also believes the Fed made the right decision not to cut rates even though he remains worried about the outlook for AIG and Washington Mutual and other troubled financials.
"I am concerned about about a number of banks and institutions being on the precipice of another downward spiral," he said. "But I don't know if [a quarter- point rate cut] would have helped us enough."
Libby said it's important for the Fed to not become too accommodative to the whims and demands of Wall Street.
Future rate cuts not out of the picture
What's more, the Fed may still wind up lowering rates later this year or early next year due to the weakness in the financial system, Hembre said. If the job market weakens further and oil prices continue to fall, that would reduce inflation fears and make it easier to justify a rate cut.
"We're likely to see inflation fall significantly and unemployment go higher, so that's a prescription for more Fed [cuts]," said Hembre.
Baumohl also noted that the Fed's decision Tuesday was unanimous -- the first time that's happened since early January.
Dallas Fed President Richard Fisher voted to raise rates at the last two meetings when they were left unchanged and voted against some of this year's rate cuts. Philadelphia Fed President Charles Plosser joined Fisher in some of his dissents during that period.
Baumhol thought the lack of a dissenting vote was key given the many fires that the Fed is trying to put out.
"This unanimity is important at this critical moment," he said. 
First Published: September 16, 2008: 2:18 PM EDT
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