Financial System Suffers Relapse

By Neil Irwin and Renae Merle
Washington Post Staff Writers
Friday, November 21, 2008

The financial system, which had recently shown glimmers of improvement, is unraveling again.

After a few weeks in which credit started flowing more freely through banks, giving relief to financial markets, prices continued to plummet yesterday for all but the safest investments, dragged down by fears of a deeper and longer recession than even many pessimists had expected.

Investors were so eager to move money into ultra-safe U.S. Treasury debt yesterday that they were effectively paying the government to hold on to their cash.

Meanwhile, the stock market fell nearly 7 percent yesterday, as measured by the Standard & Poor's 500-stock index, now at its lowest level since 1997. Financial companies have been particularly hard hit, especially Citigroup, whose shares lost half their value this week.

Saudi Prince Alwaleed bin Talal, the largest shareholder in the company, announced a new investment in the firm as a show of support, following a major sell-off Wednesday. But it wasn't enough to stanch the bleeding, as the shares fell an additional 26 percent yesterday.

The bank has asked the Securities and Exchange Commission to reinstitute its temporary ban on short-selling shares of financial firms, according to an industry source familiar with the matter who spoke on condition of anonymity because the communications with the bank were private.

Citigroup issued a statement yesterday insisting that its health is strong. The company "has a very strong capital and liquidity position and a unique global franchise," it said. "We are focused on executing our strategy, including our targeted expense and legacy asset reductions, and we believe the benefits will be seen over time."

A Citigroup spokesman declined to comment on reports that the company is considering a sale.

Citigroup is being pummeled, but the entire sector has been under pressure, said Sean Ryan, a banking analyst with New York-based Sterne Agee. "It is just a hideous environment for anyone," Ryan said.

The relapse in the markets poses a predicament for economic policymakers at the Treasury Department and Federal Reserve, who have used extraordinary tactics to try keeping the financial system glued together. The Treasury has injected more than $200 billion into banks, while the Fed is lending directly to companies by buying their short-term debt.

These were among the steps that helped achieve a measure of healing in recent weeks, particularly in making banks more confident about lending to each other. Financial indicators show that conditions remain better than they were in October, but now, confronted with the prospect of a deep recession, investors are bracing for a new round of damage to financial companies.

Citigroup was a major concern yesterday, but the misery on financial markets had no single cause. In Washington, talks broke down over a government rescue of major automakers, raising the specter of massive job losses. The broader economic picture also darkened with a report yesterday that more Americans filed for unemployment insurance benefits last week than in any week since 1992.

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