Global Stocks Sink as Crisis Spirals; Fed Moves to Thaw Credit Markets
Tuesday, October 7, 2008
With financial markets in near-meltdown, governments around the world scrambled to find new ways to infuse vast amounts of cash into banks and even directly to companies to help resuscitate the global financial system.
The Federal Reserve last night was weighing a plan that would in effect make it a major funder of a wide range of U.S. businesses facing imminent cash shortages. The Fed also said yesterday that it would push $900 billion into the U.S. banking system, a six-fold increase in its program of lending money to banks.
The measures followed similar efforts by other central banks and governments around the world over the weekend and yesterday to get financial institutions to stop hoarding money and start lending to one another and to their customers.
It wasn't enough. Stock markets began a steep tumble in Asia, where most national markets were down considerably, and then declines accelerated in Europe on fears of new bank failures. The French stock index tumbled 9 percent, the German index dropped 7 percent and the British benchmark index fell nearly 8 percent. Russia was off nearly 20 percent.
In the United States, the Dow Jones industrial average fell 3.6 percent, closing below the 10,000 level for the first time since 2004. It had been down nearly twice that at one point before staging a late rally.
With the financial crisis now engulfing most of the developed world, a meeting scheduled for later this week in Washington of the International Monetary Fund and World Bank will probably turn into a summit that could provide a forum for coordinated action.
But there was little sign of coordination among European leaders, who could not agree over the weekend on a common approach to the crisis and who yesterday bickered over what sorts of protections they would offer investors and institutions.
While Europe struggled to stop new bank failures, in the United States, alarm has increasingly focused on the commercial paper market, where all sorts of businesses and local and state governments turn for money for day-to-day operations. For the past week, that market has been nearly paralyzed, and yesterday, the cost of such borrowing soared.
"The big gorilla is really liquidity," said Edward Liebert, treasurer of Rohm & Haas and chairman of the National Association of Corporate Treasurers, 100 of whose members discussed the crisis in a conference call Thursday.
Last night, the Fed was drawing up plans to set up a special fund that would buy short-term commercial paper. The purchases would benefit banks as well as non-financial companies.
The fund would be financed by a loan from the Fed, and any losses would probably be covered by the Treasury using its new $700 billion bailout package. Fed and Treasury lawyers were hammering out details last night.
Purchasing commercial paper through the new special entity would increase risks for the Treasury, and ultimately taxpayers, while potentially relieving companies of the downside risk of bad behavior, financial experts said. One senior U.S. bank executive said it was "like taking the fire sensors out of the building."