- The Washington Times - Tuesday, March 3, 2009

UPDATED:

Stocks plummeted to their lowest levels in nearly 12 years as the troubles of two international financial giants reignited fears of a burgeoning worldwide banking crisis.

The Dow Jones Industrial Average plunged through 7,000 at the open of trade and landed 300 points lower at 6,763, more than 52 percent below its all-time high in October 2007. It last closed below 7,000 points in May 1997.

The Standard & Poor’s 500 Index dropped nearly 5 percent to a little more than 700, a critical psychological level for investors and the lowest since November 1996. The fall reflected another rout in banking and financial stocks, which lost between 10 percent and 20 percent of their value. All of the major indexes have lost nearly a quarter of their value so far this year.

American International Group (AIG) shook the markets after reporting a $62 billion fourth-quarter loss, the largest quarterly loss in corporate history, despite an expensive takeover of the insurance giant by the Treasury and expanded assistance announced Monday. Europe’s huge HSBC bank also fell into dire straits and announced that it is closing its U.S. consumer-lending division Household Finance, adding to a downdraft in European and American stocks.

The market failed to take comfort in a government report showing the first rise in consumer spending in six months, as investors focused on the deteriorating situation in banking, manufacturing and housing. Most critical, analysts said, was the seemingly never-ending banking crisis, which has been the principal force driving down the markets for more than a year.

“Almost six months have lapsed” since the severest leg of the banking crisis emerged in September, said Sung Won Sohn, an economics professor at California State University at Channel Islands. “But there is no clear and bold plan to stabilize the banking system. The U.S. government has moved from crisis to crisis without a clear goal.”

The Treasury’s move to shore up insurance giant AIG with $30 billion in additional loans Monday, like its move to assist Citigroup on Friday, followed a pattern of the government taking action only when the major financial firms were on the verge of another meltdown and had no other choice.

“The drifting of policy has been a major deterrent to financial market stability,” Mr. Sohn said. “In the meantime, people can’t purchase houses, cars and furniture because credit is not available.”

Talk of the nationalization of banks also spooks Wall Street, even though the government nationalizes banks nearly every week now when the Federal Deposit Insurance Corp. takes over failed banks and sells off their assets, said Mr. Sohn, a former chief economist at Wells Fargo bank.

Although nationalization can be positive for a bank if it means the government fixes its problems, downsizes it and then sells it back to the private sector, it also poses the threat of wiping out investors’ stock holdings. Thus the threat of nationalization has played a big role in the latest downturn in the market, Mr. Sohn said.

Jeffrey Kleintop, chief strategist at LPL Financial, said investors are antsy about the Treasury’s failure to provide convincing details of how it plans to rescue major banks like Citigroup. But he said markets may be soothed later this week when the Treasury releases details on its program for easing the home foreclosure crisis, which is the source of losses that are undercutting banks.

“Don’t panic,” he said, because the foreclosure prevention program may go a long way toward relieving the relentless pressure and losses on banks.

“The core of the crisis comes down to housing,” he said. “A home is most families’ biggest asset. Falling home prices undermine consumers’ confidence to spend and drag down the economy. The financial crisis was the result of financial institutions’ high degree of leverage to mortgages of questionable quality.”

Mark Frey, vice president at Custom House, a Canadian investment firm, said the worsening losses at AIG, despite its nearly $200 billion in loans from the government, set off an already jittery market worried about a banking meltdown in Europe.

Besides insuring more than 100 million Americans through various avenues, AIG has offices in 130 nations and extensive ties with major banks in Europe and Asia as well as the United States. So its health is viewed as important on both sides of the Atlantic. The Treasury’s move to open a new $30 billion line of credit for AIG and ease the repayment terms on other loans and preferred stock helped the company avert a ratings downgrade that could have set off collateral calls on properties it insures and an adverse chain reaction around the globe.

Meanwhile, investors were shaken by news over the weekend of deep losses suffered by billionaire Warren Buffett. They were also worried that the European Union seems no closer to grappling with its burgeoning bank problems than the United States, Mr. Frey said.

“Traders the world over are wrestling with yet another round of risk aversion after the failure to reach a consensus on a European Union-funded financial sector bailout program over the weekend,” he said. “A contingent of European nations joined Germany in its steadfast opposition to the program, declaring that they would prefer to handle individual crises on an as-needed basis.”

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