Thursday, September 18, 2008
Problems in money markets also added to the fear on Wall Street.
McClatchy Newspapers
WASHINGTON — The U.S. government this year has placed on its books the liabilities of a major investment bank in March, two mortgage-finance giants earlier this month, and this week, the nation’s largest insurer.
The world of free-market finance as we know it is over.
Turmoil was the word of the day Wednesday as global stock exchanges plunged and investors flocked to safer havens. The Dow Jones Industrial Average finished down 449.36 points to 10,609.66, while the S&P 500 shed 57.21 points to 1,156.39 and the technology-dominated Nasdaq lost a whopping 109.05 points to 2,098.85. All three indexes were off by more than 4 percent.
Contracts for future delivery of gold, an ever-ready hedge against declining asset prices, rose $85 an ounce in trading before settling up $70, or 8.9 percent, at $850.50.
If the Federal Reserve’s Tuesday night rescue of insurer American International Group was supposed to calm global financial markets, it didn’t happen Wednesday. Russian markets were so volatile that authorities halted trading in stocks and bonds, and Brazil’s Bovespa index fell almost 6 percent.
Adding to the fear on Wall Street and beyond were problems in money markets, usually considered among the safest places for ordinary investors. One of the giants in this field, Reserve Primary fund, which manages $65 billion, said late Tuesday that it would temporarily suspend some customer redemptions because of its exposure to Lehman Brothers, which filed for bankruptcy protection Monday.
This led other fund companies such as Vanguard to issue statements that they had no such problems in their money-market funds, but the hint that any player in this market had problems added to the anxiety.
In a span of less than 10 days, the entire landscape of U.S. finance was turned upside down.
This week’s shakeup followed the Sept. 6 seizure by the federal government of mortgage-finance giants Fannie Mae and Freddie Mac, which together finance about half the mortgages in America.
The assault by investors on the golden temples of finance came just hours after the Fed shocked the financial world by stepping up with an $85 billion, 24-month loan to AIG, which effectively bought the government a controlling interest in the global insurer.
The Fed’s move was bolstered by an announcement Wednesday that the Treasury Department will auction about $40 billion in new bonds for use by the Fed in helping AIG access capital and eventually pay off its loan by selling off some of its businesses.