Stocks Tumble amid AIG, Fed, SEC News
Businessweek - Market Snapshot September 17, 2008, 11:28AM EST
Major indexes sank Wednesday as investors digested more extraordinary developments, including the government’s $85 billion bailout of AIG
U.S. stocks headed sharply lower Wednesday morning amid more extraordinary developments on Wall Street. Late Tuesday, the U.S. government extended an $85 billion lifeline to crippled insurer American International Group (AIG; -41.3%), which because of its role in the credit default swaps market is a vital cog in the world financial system. The AIG bailout raises concerns that there are other problems lurking for major financial institutions in one of Wall Street’s worst ever financial crises, says S&P MarketScope.
On Wednesday, the SEC moved issued rules against naked short selling aimed at protecting stock investors, according to press reports. Also Wednesday, a temporary supplemental financing program for the Federal Reserve was announced by the Treasury Department Wednesday at the Fed’s request, using T-bill auctions to raise cash for the central bank.
Bonds were higher after the Treasury announcement. The dollar index was lower. Gold futures were soaring in a flight to safety. Crude oil futures were higher following the release of the Energy Dept.’s weekly inventory report that showed a drop in U.S. inventories;.
On Wednesday morning, the Dow Jones industrial average fell 263.39 points, or 2.38%, to 10,795.63. The broader S&P 500 index slumped 34.96 points, or 2.88%, to 1,178.64. The tech-heavy Nasdaq composite index shed 68.98 points, or 3.12%, to 2,138.92.
Activity in the broader market was resoundingly negative. On the New York Stock Exchange, 27 stocks fell in price for every 3 that gained. The ratio on the Nasdaq was 21-4 negative. Trading was active, with financial sector shares seeing heavy selling.
In just under two weeks, financial markets have absorbed some astonishing developments: the bailout of giant mortgage firms Fannie Mae (FNM; -12.7%) and Freddie Mac (FRE; -2.1%), the bankruptcy of Lehman Brothers (LEH; -50.3%), and the takeover of Merrill Lynch (MER; -9.7%) by Bank of America (BAC; -5.4%). The AIG news underscored the scope and severity of the current financial crisis.
Indeed, stresses remained in global financial markets Wednesday. The cost of insuring against default continues to rise, if not soar, across market instruments, reports Action Economics. The credit default swaps on Morgan Stanley (MS) widened through 900 basis points while Goldman Sachs (GS) CDS is out almost 100 basis points through 500 basis points. Contracts on Citigroup climbed 40 basis points wider to 310 basis points. Investment grade credit default swap rate has widened by 3 basis points to 203 basis points currently, according to the Markit CDX index, down from a record wide at 299 basis points yesterday.
Not even the U.S. government is immune, says Action Economics, as the liabilities taken on from the numerous bailouts has seen the CDS on the 10-year Treasury note rise 4 basis points to 30 basis points, according to Bloomberg. It stood at 2 basis points just before the credit crisis hit last year.
News that money market fund Reserve Fund “broke the buck” Tuesday was particularly damaging after it wrote off $785 million in Lehman debt and suspended redemptions, says Action Economics.
For the Fed’s financing scheme, advanced notice will be given for any such auctions, while the program is aimed at shoring up the Fed’s balance sheet. ”
to be continue
source: Businessweek
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