Medeshi Sept 16, 2008Lehman bankruptcy sparks global turmoil
LONDON: Global stock markets plunged yesterday as the dramatic collapse of US investment bank Lehman Brothers sparked sharp losses across the financial sector on fears more bad news is to come.
With European bourses down between three and four percent, Wall Street slumped after a bankruptcy filing by Lehman Brothers and the distress sale of Wall Street rival Merrill Lynch to Bank of America.
The central banks, led by the US Federal Reserve, rushed to inject tens of billions of dollars into the money markets to head off any rush on liquidity as investors pulled money out of stocks and looked for safety.
The Federal Reserve yesterday said it had agreed to inject $70 billion into financial markets. The European Central Bank injected 30 billion euros ($42.7 billion) in a one-day special operation while the Bank of England said it had provided 5.0 billion pounds (6.3 billion euros, $9 billion).
Asia tumbled first on the news yesterday, followed by the Middle East, Russia and then Europe before the shock wave hit the North and South American markets.
Lehman Brothers Holdings Inc. filed for bankruptcy protection, after trying to finance too many risky assets with too little capital, making it the largest and highest-profile casualty of the global credit crisis. Based on its assets at the time of filing, Lehman surpassed WorldCom as the largest US Bankruptcy filing ever. Lehman had about $639 billion in assets at the time of filing, while WorldCom had about $107 billion when it filed for bankruptcy protection in 2002.
At the same time, the dollar fell heavily against the euro before recovering some lost ground in volatile trade while oil prices plunged yesterday to seven-month lows near $91 on prospects of weaker energy demand.
Brent North Sea crude for October delivery tumbled $4.84 to $92.74 after earlier hitting $91.17 a barrel — the lowest level since February. New York’s main contract, light sweet crude for October, lost $4.24 to $96.94.
“The turmoil in financial markets yesterday in the aftermath of the bankruptcy of Lehman Brothers and the takeover of Merrill Lynch, is a clear indication that global de-leveraging and the related decline in asset prices have not yet run their course. The decision of US authorities to allow Lehman Brothers to enter bankruptcy suggests that the worst may be over from the point of view of systemic risk to the financial system,” Howard Handy, general manager and chief economist of Samba Financial Group, said.
He added: “Central banks in Europe and the US have taken further timely steps to provide more market liquidity and are determined to avert systemic threats. Beyond this it will be essential for global banks to rebuild their capital. And a solution will need to be found to the dilemma resulting from the perverse effect of mark-to-market valuation in times when asset prices fall beyond reasonable prospective values.”
Handy said, “With nearly $1 trillion in cash estimated to be sitting in hedge funds, there is the wherewithal for asset prices to recover once risk takers perceive that a bottom is near.”
John Sfakianakis, chief economist at SABB (The Saudi British Bank) said, “The US banking crisis shows that no financial institution is infallible and risk complacency have costs. Lehman was a global giant that went down like a deck of cards. The most severe financial crisis since the 1929 crash does have structural and systemic problems that require important regulatory shakeups in the US. The complacency of the financial services sector and their involvement in the real estate bubble does offer important lessons, especially for some countries in the GCC, which are facing their own asset inflation moments.”
He said that the negative sentiments will continue but the challenge is in maintaining financial sanity. “There is no doubt that the negative sentiment will continue for sometime to come given that we don’t know yet where the bottom lies. The challenge lies on the remaining two global investment banks to maintain financial sanity. Time will tell how financial institutions will come out of this crisis.
“The medium-term outlook remains bleak as US consumers are faced with tighter credit, asset deflation as well as lack of confidence in the general economy. The optimistic view offered today is that we are soon going to reach a bottom and a recovery should be in sight by either yearend or the first quarter of 2009,” he said.
“The pessimists expect markets and economies to languish during 2009 and a recovery taking place sometime in 2010. The US has been decisive in dealing with the problems in the banking sector and one has to recognize that the balance between panic and market confidence is a very difficult task. Refusing to financially support Lehman with government money, the US authorities showed they are not willing to help a troubled firm.
“But being over-supportive the US government needs to avoid criticism of helping complacent bankers who should be held accountable. Shirking of the financial sector has a social cost which also has to be taken into account” he said.
Some analysts feared a tidal wave of financial trouble as firms linked to Lehman Brothers scrambled to cover their positions, possibly leading to more selling pressure.
US stocks were in a dramatic sell-off yesterday amid a widening credit crisis, as bank failures and takeovers eroded the confidence of investors. The blue-chip Dow Jones Industrial Average closed down more than 500 points to below 11,000 — its biggest one-day drop since 2002.
In Canada, stocks fell about three percent while the Brazilian market, South America’s largest, lost five percent at the open but later steadied to show a loss of around four percent. In London, the FTSE 100 index was down 3.92 percent at 5,204.20 points. In Paris, the CAC-40 tumbled 3.78 percent to 4,168.97 points and in Frankfurt the DAX shed 2.74 percent at 6,064.16 points. The Euro Stoxx 50 index of leading euro zone companies lost 3.67 percent.
In Asia, where Tokyo and Hong Kong were among several markets closed for a public holiday, shares fell sharply, with Sydney down 1.8 percent and Singapore off 3.27 percent.
Gold prices rebounded yesterday. On the London Bullion Market, the price of gold rose to $785.70 per ounce, from $750.25 late on Friday.
Gulf Arab stocks fell to 14-month lows in frantic trading yesterday.
Saudi Arabia’s leading index slumped 6.5 percent to its lowest level since July, 2007, as investors sold across the board to avoid the risk of a financial storm. The Tadawul All-Share Index (TASI) closed 503.92 points down at 7,255.15. The stock market turnover was about SR4.49 billion as all 124 shares were in the red yesterday.
Shares in Saudi Basic Industries Corp. (SABIC) plunged 6.27 percent to close at SR104.50. Al-Rajhi Bank shares declined 5.88 percent to SR76.
Few Gulf Arab companies were spared as investors across the globe dumped emerging markets stocks, with India’s 30-share BSX index down 3.4 percent and Taiwan’s TAIEX down 4 percent.
Dubai’s leading index fell 8 percent at one point to the lowest level since April, 2007, as investors exited banks and real estate companies before recovering partially to close down 1.7 percent as investors snapped up cheap shares.
The Doha benchmark ended 7.06 percent lower at 8,216 points, its biggest one-day fall since Jan. 22.
Kuwait’s main index closed 3.8 percent down at 12,360 points. The index has fallen more than 20 percent since June 25.
— With input from agencies
