Wall Street, which for long has been the symbol of the US' superpower status, came crashing down, as two of its storied financial firms became history, and another one was rescued by the government from the brink of a collapse. The shocking events, which sent global financial markets into a tailspin, came just a few days after Washington's bailout of Freddie Mac and Fannie Mae, and could change the financial landscape in the US. Put on the backfoot by the alarming and disastrous developments on Wall Street, the Bush regime launched a multi-pronged assault to salvage the rapidly deteriorating situation. By the close of trading on Friday, Washington was still putting together a mega rescue package to get to the root of the credit crisis and restore sanity in financial markets. And, though stock markets across the world cheered the efforts of governments and regulators to stem the financial firestorm, doubts persisted over the fate of Wall Street and its larger ramifications for the global economy.
It all started with the 158-year old Lehman Brothers filing for bankruptcy as it failed to find any buyers and Washington refused to lend a helping hand. Fearing a similar fate, Merrill Lynch decided to sell itself to Bank of America. It didn't stop there, as insurance giant AIG too almost blew up. But, unlike Lehman, it was a little more fortunate, as the Federal Reserve lent it $80bn for two years in return for an 80% stake. Amid all the gloom, Morgan weighed its options, and kicked off merger talks with Wachovia and China's sovereign wealth fund. Washington Mutual too put itself on the block. The contagion was not restricted to the US alone. Across the Atlantic, the British government too had to engineer the rescue of HBOS, the biggest housing mortgage lender in the UK, by asking Lloyd TSB to acquire it. Another British bank Barclays agreed to purchase Lehman's core US businesses after dropping a plan to buy the whole of it. Similar deals were being contemplated for buying Lehman's various businesses in Asia and Europe.
One of the biggest money market funds imposed a seven-day freeze on investor redemptions after the net asset value of its shares fell below $1. The rates on loans that banks charge each other rapidly rose in the turmoil. The London interbank offered rate, or LIBOR, jumped by 3.33 percentage points, to 6.44%, on its overnight dollar rate, its biggest increase ever. Yields on three-month Treasury bills fell to their lowest level since daily records began in 1954. Trading was suspended on Russia's stock markets when they went into a free-fall that was not halted even by a government injection of $44bn into the country's three biggest banks.
In the midst of it all, the central banks swung into action to inject billions of dollars in liquidity to unclog the stress in credit markets. The world's top 10 banks and financial firms formed a mega fund to ease the credit crunch. But, the Fed decided to keep interest rates unchanged, pledging to take action when the need arises. The Bank of Japan too left its benchmark interest rate steady. However, China cut interest rates and lowered the reserve requirement for small banks. China also took a series of other steps to bolster its sagging stock markets. In India, the RBI too had to move in to boost liquidity, which worsened due to the outflows towards advance tax numbers. The Finance Minister threw his weight behind Indian banks, saying that they are well regulated and were largely unaffected by the western financial turmoil. ICICI Bank's share took a hit amid news of $80mn exposure to Lehman, but the bank's top management said the bank was safe and sound.
Stocks across the world took a severe beating in the early part of the week, but staged a smart rebound after regulators in the US and UK banned short selling in financial companies. AIG's rescue and talk of a comprehensive program to cleanse the US financial system also helped in the turnaround. Crude oil and gold were highly volatile. Gold initially rallied as investors rushed to safe-haven assets like precious metals and government bonds, as equities remained under pressure. The dollar weakened early on in the face of the crippling financial mess. But, by the end of the week, trend across these markets reversed amid growing optimism that the US government's move to come out with a wider bailout plan for its battered financial markets will prevent further pain and restore confidence among global investors. As a result, crude oil had its biggest three-day rally in almost a decade, while gold futures dropped the most in a week and the dollar rose the most against the yen since April.
It all started with the 158-year old Lehman Brothers filing for bankruptcy as it failed to find any buyers and Washington refused to lend a helping hand. Fearing a similar fate, Merrill Lynch decided to sell itself to Bank of America. It didn't stop there, as insurance giant AIG too almost blew up. But, unlike Lehman, it was a little more fortunate, as the Federal Reserve lent it $80bn for two years in return for an 80% stake. Amid all the gloom, Morgan weighed its options, and kicked off merger talks with Wachovia and China's sovereign wealth fund. Washington Mutual too put itself on the block. The contagion was not restricted to the US alone. Across the Atlantic, the British government too had to engineer the rescue of HBOS, the biggest housing mortgage lender in the UK, by asking Lloyd TSB to acquire it. Another British bank Barclays agreed to purchase Lehman's core US businesses after dropping a plan to buy the whole of it. Similar deals were being contemplated for buying Lehman's various businesses in Asia and Europe.
One of the biggest money market funds imposed a seven-day freeze on investor redemptions after the net asset value of its shares fell below $1. The rates on loans that banks charge each other rapidly rose in the turmoil. The London interbank offered rate, or LIBOR, jumped by 3.33 percentage points, to 6.44%, on its overnight dollar rate, its biggest increase ever. Yields on three-month Treasury bills fell to their lowest level since daily records began in 1954. Trading was suspended on Russia's stock markets when they went into a free-fall that was not halted even by a government injection of $44bn into the country's three biggest banks.
In the midst of it all, the central banks swung into action to inject billions of dollars in liquidity to unclog the stress in credit markets. The world's top 10 banks and financial firms formed a mega fund to ease the credit crunch. But, the Fed decided to keep interest rates unchanged, pledging to take action when the need arises. The Bank of Japan too left its benchmark interest rate steady. However, China cut interest rates and lowered the reserve requirement for small banks. China also took a series of other steps to bolster its sagging stock markets. In India, the RBI too had to move in to boost liquidity, which worsened due to the outflows towards advance tax numbers. The Finance Minister threw his weight behind Indian banks, saying that they are well regulated and were largely unaffected by the western financial turmoil. ICICI Bank's share took a hit amid news of $80mn exposure to Lehman, but the bank's top management said the bank was safe and sound.
Stocks across the world took a severe beating in the early part of the week, but staged a smart rebound after regulators in the US and UK banned short selling in financial companies. AIG's rescue and talk of a comprehensive program to cleanse the US financial system also helped in the turnaround. Crude oil and gold were highly volatile. Gold initially rallied as investors rushed to safe-haven assets like precious metals and government bonds, as equities remained under pressure. The dollar weakened early on in the face of the crippling financial mess. But, by the end of the week, trend across these markets reversed amid growing optimism that the US government's move to come out with a wider bailout plan for its battered financial markets will prevent further pain and restore confidence among global investors. As a result, crude oil had its biggest three-day rally in almost a decade, while gold futures dropped the most in a week and the dollar rose the most against the yen since April.
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