- The Washington Times - Thursday, September 18, 2008

UPDATED:

FRANKFURT, Germany (AP) – The world’s major central banks banded together on Thursday to inject as much as $180 billion into money markets in a bid to stave off the growing global financial crisis. Meanwhile, President Bush canceled his travel plans and addressed the United States about the economy.

The Federal Reserve joined with the European Central Bank, the Bank of Canada, the Bank of England, the Bank of Japan and the Swiss National Bank to pump more short-term dollar liquidity into the financial system.

Credit markets have tightened since Monday after the weekend collapse of investment house Lehman Brothers Holdings Inc., and central banks already provided billions Monday and Tuesday in hopes of turning the tide and to keep fearful banks from hoarding cash.

In its statement, the Fed said it had authorized a $180 billion expansion of swap lines, or reciprocal currency arrangements, with the other central banks, including amounts up to $110 billion by the ECB and up to $27 billion by the Swiss National Bank.

The Fed also said new swap facilities had been authorized with the Bank of Japan for as much as $60 billion; $40 billion for the Bank of England and $10 billion for the Bank of Canada.

“These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures,” the Fed said in a statement on its Web site.

WASHINGTON (AP) – President Bush says he shares the American people’s concern about the situation in U.S. financial markets and the economy.

Bush says the markets are adjusting to “extraordinary measures” the government has taken to stabilize the economy.

The president delivered a statement to the America people from just outside the Oval Office. He said that he and his advisers are working to promote stability in the markets. But Bush did not announce any new policy moves.

The Federal Reserve joined with the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank to pump more short-term dollar liquidity into the financial system.

Credit markets have tightened since Monday after the weekend collapse of investment house Lehman Brothers Holdings Inc., and central banks already provided billions Monday and Tuesday in hopes of turning the tide and to keep fearful banks from hoarding cash. The hope is that that would help stabilize world financial markets that have been reeling.

In its statement, the Fed said it had authorized a $180 billion expansion of swap lines, or reciprocal currency arrangements, with the other central banks, including amounts up to $110 billion by the ECB and up to $27 billion by the Swiss National Bank.

The Fed also said new swap facilities had been authorized with the Bank of Japan for as much as $60 billion; $40 billion for the Bank of England and $10 billion for the Bank of Canada. The Bank of Canada said it was “not necessary” to draw on the swap facility at the moment.

“These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures,” the Fed said in a statement on its Web site.

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Wall Street stocks plunged Wednesday in a day of frenzied trading amid signs that distress among the nation’s financial giants is growing while the U.S. government’s ability and willingness to bail them out is shrinking.

Panicked banks sought out mergers that would help ensure solvency. Washington Mutual, the giant savings bank riddled with debt problems, offered itself for sale, while Wachovia bank announced new losses and approached Morgan Stanley about a merger that would provide the investment house with a more stable deposit funding base while expanding the bank’s access to capital.

The Dow Jones Industrial Average plummeted 450 points — its second massive decline this week — as the financial world absorbed the news that American International Group had to surrender control of itself to the government in order to get an $85 billion lifesaving loan from the Federal Reserve. Investors and analysts alike interpreted the government’s terms for the AIG bailout as an overt effort to ward off further pleas for federal help.

AIG “pays a steep price” for the rescue, said Robert Brusca, economist at FAO Economics. “Any firm tottering on the edge here is not going to feel that there is a safety net it will want to fall into. Think Vietnam-era death pits with punji sticks at the bottom.”

The government’s own financial outlook took a beating in the $85 billion loan deal for AIG. When added to the potential $200 billion rescue of Fannie Mae and Freddie Mac earlier this month, the $29 billion rescue of Bear Stearns in March and increasing bank failures, it leaves the U.S. government in a “weakened” financial state though it retains its AAA rating, Standard & Poor’s Corp. said Wednesday.

Gold prices soared to their highest levels in nine years as investors worried that the deepening credit crisis may tarnish the gleaming reputation of even the U.S. Treasury and its safe-haven securities.

The political world debated the merits of the AIG bailout while the Bush administration explained that it abandoned its free-market policy to rescue the insurer because it was essential to stabilize the broader economy.

Mr. Brusca said the deal may not be as generous as it appears, in part because the government is charging “an extremely high rate” of interest on the loans — 8.5 percent above the London Interbank Offered Rate — which will encourage AIG to quickly sell off assets and pay back the Fed.

The Fed will get a profit on this, which it should,” he said.

The deal appears structured similarly to the Chrysler bailout in the 1980s, giving the Treasury warrants or special shares representing 79.9 percent control of AIG. In addition, the Fed forced out AIG’s chief executive, Robert Willumstad, and replaced him with Edward Liddy, a former Allstate executive.

“It was not a nationalization because the Fed does not intend to run AIG,” Mr. Brusca said.

Edward Hadas, analyst at Breakingviews.com, said the AIG rescue “leaves the door open to many more costly rescues. But the damage to the country’s financial reputation could prove even more painful.”

Even more expensive bailouts may be looming, he said.

“The tab could rise quite soon. Washington Mutual, the largest thrift in the U.S., is under threat after the rating agencies downgraded its debt to junk,” and other banks are likely to follow, Mr. Hadas said. “When it comes to conventional banks, the government is on the hook through deposit insurance.”

While the AIG deal was alarming to stock investors in financial firms, it helped to ease strains in the credit markets. The Fed’s loan will enable AIG to meet all of its credit and insurance commitments while trying to raise money by selling some of the company’s sound businesses.

“This takeover of AIG forestalls to some extent the recent 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 at Global Insight.

“However, the risks to the financial system and the economy remain massive, and downward pressure on financial asset prices - and the value of their underlying collateral - continues to mount.”

Some political and financial officials were disgusted with the Fed’s actions.

“Where does this stop? What other troubled companies will the Fed nationalize, and how much will it cost?” asked Peter Schiff, president of Euro Pacific Capital. “AIG is not a bank; it is not even an investment bank. The ‘lender of last resort’ power was supposed to apply only to banks.”

“The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America’s once-vaunted free-market economy,” he said. “Today’s historic surge in the price of gold shows that at least a few investors are refusing to march in the parade.”

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