September 18, 2008	Thursday	Ramazan 17, 1429

NEW YORK / LONDON, Sept 17: The global financial firestorm tore through markets on Wednesday as shares of Wall Street firms Morgan Stanley and Goldman Sachs plummeted and Britain’s biggest mortgage lender neared a sale in the latest signs of extreme distress in the financial industry.

Tuesday’s surprise $85 billion rescue of insurer American International Group by the US Federal Reserve did little to calm investors’ nerves, and US stocks dropped as much as 4.1 per cent.

The Dow Jones Industrial Average fell 2.48 per cent to 10,785.20 while the tech-heavy Nasdaq was down 3.47 per cent to 2,138.06 in mid-afternoon deals.

In London, the FTSE 100 index tumbled 2.25 per cent to 4,912.40 points, while in Paris the CAC 40 lost 2.14 per cent to 4,000.11 points. The Frankfurt Dax was down 1.75 per cent at 5,860.98 points. Markets in Seoul and Tokyo managed to reverse early losses and closed with respective gains of 3.0 per cent and 1.21 per cent.

But Hong Kong, which had opened 2.1 per cent higher, fell back and closed 3.6 per cent down, beneath 18,000 points and at its lowest level since October 4, 2006.

The Fed said it had acted to help AIG to “protect the interests of the US government and taxpayers.”

Analysts had warned that an AIG collapse could trigger a wave of failures elsewhere.

AIG is deeply involved with financial institutions around the world and it was feared that its demise would have disastrous global consequences.

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

The White House said it was “concerned about other companies” while the presidential candidates struck populist tones, with Sen John McCain blasting Wall Street’s “casino culture” and Sen Barack Obama stressing protection for mom-and-pop investors.

The head of the International Monetary Fund, Dominique Strauss-Kahn, warned that the crisis shaking US and global markets posed a potential risk for world economic growth.

“We continue to anticipate a gradual global growth recovery in 2009, although the weekend’s developments represent a potential added risk to the outlook,” he said.

“The speed and scale of these events have added to short term uncertainties and further significant financial strains cannot be ruled out,” he warned.

The IMF predicted growth of 3.9 per cent in 2008, according to briefing published in late August. But the last official IMF prediction in mid-July foresaw growth of around 4.1 per cent.

The Fed move capped a week of bailouts, a bankruptcy on Wall Street, and central banks around the world flooding the financial system with money to prevent it from seizing up.

The result: a seismic shift in the financial industry, with some of Wall Street’s biggest names disappearing overnight.

Shares of Morgan Stanley and larger rival Goldman fell as much as 43 per cent and 27 per cent, respectively, even after both reported better-than-expected quarterly earnings on Tuesday.

The cost of protecting Morgan Stanley’s and Goldman’s debt spiked, reflecting investor fears that their debt issues are no safer than junk bonds.

Goldman spokesman Lucas van Praag said: “We think the markets will positively differentiate those financial institutions that have global, diversified business models and that outperformed through this crisis.”

Morgan Stanley spokeswoman Jeanmarie McFadden declined to comment.

PROPPING UP THE SYSTEM In the latest sign of regulatory anxiety, the US Securities and Exchange Commission curbed short-selling, or investor bets on declining share prices.

Other distress signals had popped up earlier: The cost of borrowing overnight dollars spiked above 10 per cent, indicating a deep lack of trust spooking the interbank lending market in Europe.

British bank Lloyds TSB was in advanced talks to buy domestic rival HBOS Plc to create a $50 billion mortgage giant.

The talks underscore how quickly authorities around the world are ditching long-held beliefs about free markets and competition as they seek to counter the credit crunch.

US authorities also have moved to prop up the financial system.

The AIG rescue comes just over a week after the bailout of mortgage finance companies Fannie Mae and Freddie Mac, and six months after the Fed brokered the sale of failed investment bank Bear Stearns to JPMorgan Chase.

AIG’s bailout brings to about $900 billion the total of US rescue efforts to stabilise the financial system and housing market. Authorities may get much of that money back – if asset prices do not slide further.

The week has already seen two legendary firms bite the dust: Lehman Brothers Holdings Inc filed for bankruptcy, and Merrill Lynch & Co threw itself into the arms of Bank of America Corp.

AIG faced a cash crunch after $18 billion of losses over three quarters, largely because of complex securities that are tied to mortgages, and which plunged in value as the US housing crisis deepened. The rescue kept AIG from surpassing Lehman as the largest corporate failure ever.

If it was meant to prevent a deepening of the credit crisis or sooth investors, it did not work. –Reuters/AFP