Banks react to credit crunch

September 18, 2008
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, NEW YORK, September 18 – The US Federal Reserve on Thursday threw 180 billion dollars into a global fight against the financial crisis as Wall Street legend Morgan Stanley became the latest name under attack and Britain\’s top mortgage lender was forced into a merger.

Central banks around the world launched a joint operation to stem panic in credit markets amid mounting political calls for "decisive" action to end the crisis.

The Federal Reserve said it had authorized a "180 billion dollar expansion of its temporary reciprocal currency arrangements" to provide short and medium term funding with other banks.

The European Central Bank, the Bank of Japan, Bank of England (BoE), Bank of Canada and the Swiss National Bank all joined what the BoE called "coordinated measures designed to address the continued elevated pressures in US dollar short-term funding markets."

The Bank of Japan made the latest of a series of interventions, pouring in the equivalent of 23.9 billion dollars into money markets.

The central banks have between them spent hundreds of billions of dollars this week helping threatened financial institutions and injecting cash into reeling markets. Asian shares fell heavily again Wednesday, prices were more stable in Europe.

But after the collapse of Lehman Brothers and the forced sale of Merrill Lynch, US media said Morgan Stanley was looking for help after seeing its stock drop another 24 percent Wednesday.

The reports said Morgan Stanley, one of the last two independent US investment banks, was negotiating a merger.
State-controlled Chinese conglomerate CITIC declined to comment on a report by CNBC television, quoting US and Chinese sources that it was in talks with Morgan Stanley.

China\’s sovereign wealth fund, China Investment Corporation, already owns 9.9 percent of Morgan Stanley.

The New York Times said Morgan Stanley was in "preliminary" talks with Wachovia Corporation on a merger.

US thrift Washington Mutual is also at the centre of market worries which have dragged down stocks.

In Britain, authorities rushed to douse their firestorm over Halifax Bank of Scotland (HBOS), the country\’s biggest mortgage lender, which was taken over by retail bank Lloyds TSB in an all-share deal worth 12.2-billion-pounds (15.4 billion euros, 21 billion dollars).

The bailout came after HBOS stocks plummeted in wild trading this week.

Britain\’s Financial Services Authority (FSA) was forced to issue a statement on Wednesday saying HBOS was well-funded, in an attempt to avoid a flood of savers trying to withdraw money.

It said the takeover would "enhance stability within financial markets and improve confidence among customers and investors".

Amid an international rush for safe investments, interest rates on US Treasury bonds dropped to their lowest point since 1954.

The price of gold also shot up to 868.5 dollars in Hong Kong from the closing price there of 785.5 dollars.

In London stocks rallied fractionally Thursday after the HBOS deal, but Asian stocks plummeted earlier, with Hong Kong shares down 7.4 percent and Japanese stocks down 2.2 percent.

On Wednesday, the Dow Jones Industrial Average slid 4.06 percent in the second massive loss in three sessions. In London, the FTSE 100 index tumbled 2.25 percent to 4,912.40.

The Russian stock market was closed for the third day in a row, failing even to open this time.

Markets fears that the US central bank\’s 85-billion-dollar (60-billion-euro) rescue of American International Group (AIG) this week might not be enough to end the credit crunch.

The White House said on Wednesday that recent US economic news painted a "very mixed picture" but added that the United States had "the strength" to overcome the current financial crisis.

British finance minister Alistair Darling said governments must now act "decisively and quickly" to end the crisis after the central bank operation was announced.

"The key thing, especially at this time, is to maintain stability of the banking system. That is paramount," he told BBC radio.

"We are going through a truly exceptional difficult time in relation to banks and other financial institutions," he added.

But at Heartland Advisors, portfolio manager Michael Petroff, said: "The market is trading under the assumption that every financial institution is going under…it\’s now emotional."

Aaron Smith at Economy.com said: "Investor concern is also growing about the Fed\’s ability to support markets in the future as the central bank\’s own balance sheet is reduced."

The US Treasury announced it would sell 40 billion dollars in 35-day bonds to help the Federal Reserve as it battles to shore up the economy.

Markets were turbulent as they digested the AIG rescue.

The US government got a 79.9-percent stake in AIG in return for the 85-billion-dollar loan, which followed hard on the heels of its takeover of US mortgage giants Fannie Mae and Freddie Mac.

The size and scope of the Fed intervention triggered political controversy in the United States.

"The move represents the largest lurch toward socialism that this country has ever seen," said Peter Schiff, president of Euro Pacific Capital.

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