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Dow dives 500 pts. in Wall St. nightmare
American International Group, the big insurer whose enormous balance sheet is also weighed down by big credit and mortgage losses, got some government help: New York regulators approved a quick cash infusion through borrowings from its subsidiaries.
But that did not prevent AIG’s shares from nose-diving 61 percent to $4.76 on fears that it still might face a death spiral from a cash crunch and possible credit downgrade.
Late Monday, word emerged that the Fed was urging Goldman Sachs and JP Morgan Chase to help AIG plug a $70 billion financing gap.
Now that the government has decided to step aside and let the chips fall, “the credit and financial markets are beginning to distinguish between institutions that are viable and those that aren’t, making it more likely that the latter won’t survive,” said George Feiger, chief executive of Contango Capital Advisors.
He said that the credit markets are also in shock as thousands of Lehman’s counterparties in credit deals awoke on Monday morning to the unpleasant news of the company’s downfall. The event prompted bond investors to pile into Treasury bonds in a big rush to safety.
The stock of Washington Mutual, the nation’s largest savings and loan with extensive subprime investments, fell 27 percent to $2 amid fears that it will soon be taken over by U.S. banking regulators.
Lehman shares, delisted from the New York Stock Exchange, plunged 94 percent to 21 cents.
Among the remaining Wall Street giants, Citigroup sank 15 percent to $15.24, Goldman Sachs shed 12 percent to $135.50 and Morgan Stanley dropped 13.5 percent to $32.19.
Analysts predicted that the fallout in financial markets - especially the complex credit markets that were Lehman’s specialty - will be long and painful.
“What people fail to understand is that because of the complicated legal instruments by which these subprime loans were packaged and sold, the risks are widespread and even now not fully assessed,” said Talcott Franklin, author of a recent book on litigation and the credit crisis.
“The first waves of the collapse came on the front lines, with borrower defaults and lender and broker bankruptcies. The second wave is hitting the investment banks who securitized the loans and the insurers who issued policies on the securities. Another wave is starting to hit investors, who are widespread and largely unknown,” he said.
“The shocks to each of these players in the securitization markets will reverberate throughout the U.S. and world economy and will play out over a significant period of time. The overall result is easy to project: more defaults, more bankruptcies, and more economic pain.”
Several prominent economists said the Fed should call off its fight against inflation for now and slash interest rates to limit the economic damage.
“The sudden bankruptcy of Lehman Brothers over the weekend has led to another dangerous escalation of the crisis in the U.S. financial markets - a crisis that has been seriously harming the performance of the economy for over a year now,” said Brian Bethune, chief economist of Global Insight.
“Without supporting moves by the Fed to buffer the fallout in the form of an emergency rate cut, the risks to the financial system and the economy are massive,” he said.
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