Banks Add More Funds To Stabilize Markets
Saturday, August 11, 2007
NEW YORK, Aug. 10 -- Central banks around the world pumped money into the financial system Friday, helping to settle a jittery stock market on Wall Street that at least for one day held steady despite intensifying concerns over tighter credit and its potential impact on the U.S. economy. In a sign that the turmoil in the credit market was far from over, shares of major lenders and companies that are targets of buyout deals suffered.
Stocks tumbled around the world, with major indexes in Europe and Asia falling more than 2 percent after major declines in the United States on Thursday. The European Central Bank lent $84 billion Friday to financial institutions, a day after providing $130 billion. Japan's central bank added $8.5 billion, and the Reserve Bank of Australia provided $4.2 billion.
The Federal Reserve injected $38 billion into the system in three increments Friday, its biggest one-day infusion since September 2001. The Fed sought to reassure investors by releasing a statement before financial markets opened, saying it would provide as much extra money as needed to hold its benchmark overnight interest rate at about 5.25 percent.
The demand for money overnight had pushed the rate up to more than 6 percent. The central bank "is providing liquidity to facilitate the orderly functioning of financial markets," said a statement released by the Fed Board in Washington.
A sell-off occurred early in the trading session, with the Dow Jones industrial average down by 200 points. By the closing bell, with selling reined in by the Fed, stocks ended the session mostly unchanged.
The Dow Jones industrial average of 30 blue-chip stocks finished the day down 31.14, or 0.2 percent, at 13,239.54. The tech-heavy Nasdaq fell 11.60, or 0.5 percent, to 2544.89. Standard & Poor's 500-stock index, a broad market measure, rose 0.55, or 0.04 percent, to 1453.64.
"The central banks around the world have stepped up to the plate," said Stanley A. Nabi, vice chairman of Silvercrest Asset Management. "They're sending a signal: 'Hey, we're not going to let you get into trouble.' "
Many stocks finished the day down, although energy and some consumer companies fared better. Shares in financial companies, which were pummeled Thursday, were mostly unchanged. Shares of small companies, which generally take a hit as credit is tightened and the economy slows, were higher. Some investment strategists took these as signs that the next week might be better.
"We kind of started the day with the idea that, 'Gosh, the first of the [European Central Bank] injections didn't work,' " said James W. Paulsen, chief investment strategist at Wells Capital Management. "The fact that the Fed came in might have been looked at as a positive by some . . . because they were criticized somewhat as being stuck in the mud, dogmatic, and not open to the idea of being responsive. And certainly, they showed that they would be [responsive] today."
Nonetheless, fear and uncertainty dominated, as speculation of massive liquidations by hedge funds continued to spread across trading desks and as investment firms that had little to do with the home-mortgage market reported record withdrawals by investors.
The speculation was adding to the wild swings in trading more so than in the past because of the proliferation of hedge funds, whose holdings are typically not public and whose strategy often involves the hefty use of leverage, or borrowed money. That amplifies returns, but also losses.
Wall Street is paying attention to news from "quant funds," the trading of which is based on computer-based models with limited human intervention. The fear is that such strategies can break down in a volatile market, leading to massive losses that could send ripples through the entire financial system.