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Question of the Day
Wall Street plunged Monday in its worst performance since the Sept. 11, 2001, attacks as financial markets around the world absorbed the blow of the largest bankruptcy in U.S. history and worried that other American financial giants might also fail without the cushion of government bailouts.
The Bush administration sought to portray the bankruptcy of the Lehman Brothers brokerage as a necessary correction to years of Wall Street excesses, making clear that it never even considered a federal bailout of the storied investment house. Behind the scenes, regulators in Washington and New York tried to stave off another massive failure, this time in the insurance industry.
World markets reacted with shock. The Dow Jones Industrial Average plummeted 504 points to 10,918 - its largest point drop in seven years - as investors tried to sort through an estimated 100,000 claims against Lehman, one of the country’s largest and most esteemed investment banks. With $639 billion in assets and $613 billion in debts, Lehman’s bankruptcy filing far eclipsed the bankruptcy filing of WorldCom in 2002.
The Lehman filing was just one element of a trifecta of huge financial shocks yesterday. The nation’s largest insurer, American International Group, went to the Federal Reserve and other regulators for help on getting a cash infusion to keep it from going under. In addition, the recently reeling Merrill Lynch was bought by Bank of America for $50 billion in stock.
The combination sent Wall Street whirling. Worries mounted that the renewed stress in stock and credit markets would imperil an economy already flagging under a deep slump in housing and auto production and sharp spike in energy prices. Several prominent economists said the Federal Reserve may cut interest rates when it meets Tuesday in an effort to limit the damage to the economy.
“The final cathartic rehabilitation of the financial industry has begun. Yes, it is violent and palpable,” said Bernard Baumohl, managing director of the Economic Outlook Group. “After years of excessive risk-taking, cheap credit [and] a sense of invincibility, many large financial institutions are now paying the price.”
The turning point came when the U.S. Treasury told potential buyers of Lehman over the weekend that it was not willing to bail out yet another financial institution on the rocks - something it had helped to do earlier this year with investment bank Bear Stearns as well as the mortgage finance giants Fannie Mae and Freddie Mac, Mr. Baumohl said.
Treasury Secretary Henry M. Paulson Jr. said Monday he never even considered providing government guarantees or cash to save Lehman.
President Bush sought to maintain a sense of calm amid the financial turmoil, proceeding with a long-planned state dinner with the president of Ghana and portraying Monday’s events as a necessary correction.
“I know Americans are concerned about the adjustments that are taking place in our financial markets,” Mr. Bush said in the Rose Garden. “In the short run, adjustments in the financial markets can be painful. … In the long run, I’m confident that our capital markets are flexible and resilient, and can deal with these adjustments.”
On the campaign trail, the men seeking to succeed Mr. Bush struggled to gain the upper hand on the politics of the economic crisis with neither offering many new ideas. Republican John McCain argued that his lengthy experience left him best suited to combat the greed of Wall Street and bring about change while Democrat Barack Obama blamed the crisis on years of Republican policies.
The fallout from the Lehman bankruptcy was far-flung and profound on Wall Street.
The stock market sell-off started with a 300-point drop in the Dow and worsened at the end of the day, credit markets swooned, and an unraveling of Lehman’s energy bets helped fuel a stunning $5.47 drop in oil prices to well below $100 a barrel.
The biggest surprise of the day was the abrupt sale of Merrill Lynch, a deal that was cobbled together over the weekend as a way to insure that the huge brokerage would not bethe next in line to succumb to mounting credit losses and market pressures.
Still, investors punished Merrill’s acquirer Bank of America with a 21 percent drop in its stock price on concern that the bank was taking on too much debt in the transaction.
About the Author
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