- The Washington Times - Wednesday, August 10, 2011

Wall Street stocks took another tumble Wednesday after a brief recovery as worries widened over the health of U.S. and European banks hit hard by debt crises on both sides of the Atlantic.

The Dow Jones industrial average gave up another 520 points, and major indexes lost up to 4.6 percent of their value after the stocks of banking giants from Citigroup to J.P. Morgan Chase and Goldman Sachs plunged on fresh fears of a global banking crisis.

Eyes turned in particular to megabanks in France that hold a large share of the bonds issued by Greece and other heavily indebted European countries. Societe General denied rumors of its pending collapse, but that did not prevent its stock from nose-diving by as much as 23 percent in European trading.

The shares of other U.S. and European banking megaliths, which have extensive financial ties to one another and insure one another’s investments, fell as much as 12 percent in sympathy. European stock markets swooned, with major indexes closing down from 3 percent to 6 percent.

The worries extended to France, which is one of the few countries still enjoying a AAA rating from Standard & Poor’s Corp. but whose good credit could be ruined by the high cost of cleaning up a banking crisis. The ratings agency affirmed its top-tier rating for France to quell rumors during the tumultuous day of trading.

But markets were largely inconsolable, with any whiff of widening losses on bank loans becoming a reason for investors to dump the stocks of long-standing, big-name financial firms, including those that hold up to half of U.S. consumer bank deposits and service most of their mortgage loans.

The Dow closed down 4.6 percent at 10,720, having lost more than 2,000 points in less than three weeks. The wild swings in the Dow and other indexes in recent days were caused and exacerbated by computerized trading, which typically triggers massive buy and sell orders at designated index levels.

David Kelly, chief market strategist at J.P. Morgan Funds, said the markets at this point have been taken over by irrational fears. But the danger is that the deep market losses, exceeding 10 percent on average for major stock indexes and wiping out trillions of dollars of wealth, could help trigger the very recession and banking crises that investors fear.

“The fall in stock prices may reflect the painful memories of 2008/2009,” when major banks were collapsing seemingly at the rate of one per week and global markets were in a full-scale panic and retreat, he said. Given that experience, “some investors may have decided to sell now and ask questions later.”

But the threats to the economy and banks now are milder and more manageable, he said, noting that an employment report on Friday showed hiring actually increased in the United States last month - hardly a sign of recession.

While the European Union recently adopted a policy that requires banks and other bondholders to take some losses to help cure the continent’s debt problems, the European Central Bank also is easing the pain for banks by posing as a buyer of last resort for those bonds.

That has significantly raised the value of the bonds and removed much of the threat hanging over European banks and their American counterparts because “there’s no limit to the amount of government bonds a central bank can buy,” Mr. Kelly said. “Europe has always had the resources and the tools necessary to deal with its debt problems.”

While U.S. banks generally are better capitalized than European banks and able to withstand continuing high losses on real estate loans in the United States, they too depend on growth in the economy to stay afloat and would suffer if the economy pivots back into recession as many investors fear.

Top bank executives moved quickly Wednesday to try to dispel worries about their soundness and to reassure workers and bank customers alike. J.P. Morgan Chief Executive Jamie Dimon in an interview with CNBC said he feels “comfortable” with his bank’s extensive business ties in Europe, noting that the relationships go back hundreds of years.

“Although the decline is difficult to watch and naturally reminds all of us of what happened several years ago, there is little similarity between now and then,” said Citigroup Chief Executive Vikram Pandit in a voicemail left for bank employees even before the carnage hit in Wednesday’s trading session. Citigroup was one of the sickest U.S. banks during the 2008 financial crisis.

“None of us know what the economic outlook will be, but we do know that today we are prepared to withstand whatever the future may bring,” Mr. Pandit said. “We have been profitable for the past six quarters. … We have de-risked our balance sheet significantly.”

Brian T. Moynihan, chief executive of Bank of America, whose stock plummeted 20 percent earlier this week after the bank revealed mounting losses and litigation costs on housing loans it acquired from Countrywide and Merrill Lynch in 2008, also sought to assure employees in a memo.

“Our company remains financially strong - in particular much stronger than we were either during or coming out of the economic downturn of 2008-9,” he wrote, adding that “most of the factors driving market volatility are beyond our control.”

Not everyone agrees that major U.S. banks are healthy enough to withstand the current turmoil.

Banking analyst Christopher Whalen said Bank of America, in particular, is so riddled with uncollectible bad debts inherited through its mergers with failing competitors arranged by the government in 2008 that it is effectively insolvent and should be shut down by federal regulators using the new powers given them in the Wall Street reform law last year.

Bank of America Corp., or BAC, “is a too-big-to-fail zombie created by the Obama administration and the Fed to protect U.S. financial markets, but is now so vast and unstable that it threatens the global economy,” he said.

The shutdown and breakup of such a large institution would have to be done quickly and carefully, he said, because Bank of America plays such an important role in the U.S. economy. “Millions of payroll deductions, property tax payments and remittances flow through BAC daily,” and those would have to continue without interruption under any government takeover.

He predicted a “steady erosion of public confidence” in the megabank, with offices on many street corners. “The only way to end the uncertainty and also accelerate the economic recovery is to put BAC through a restructuring,” he said.

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