The US Federal Reserve meets tonight and a rate cut has suddenly become a very real option after the Lehman Brothers collapse and other events on Wall Street in the past four days.
Economists say there’s a real chance rates could be cut by up to half a per cent, taking the Federal Funds Rate to 1.5%.
New problems re-emerged this morning at American Insurance Group, Washington Mutual, the country’s biggest Savings and Loan, and starting to swirl around the huge General Electric Company.
They threaten to deepen the crisis in ways not even considered yesterday.
The Fed called an emergency meeting at its New York offices to try and organise a emergency line of credit for AIG, which is staggering under fears of big losses and write-downs from credit insurance contracts.
Media reports put that line of credit at $US70 billion to $US75 billion.
It got an effective $US20 billion injection by insurance regulators from New York State who allowed it to use capital from its insurance businesses in the parent.
Another crisis is in the process of unfolding on Wall Street, coming at the end of the worst day’s trading on markets since September 11.
The US federal reserve called a high level meeting in its New York Fed offices this morning to try to organise some sort of support for AIG with Goldman Sachs and JPMorgan attending the meeting. They are representing big investors in discussions about some sort of cash lifeline for AIG.
Sunday AIG rejected an offer from private equity groups for a $US20 billion injection and asset sales and despite claims it was working on a new plan, nothing emerged during the day except the lifeline from the insurance regulators.
So, AIG shares sung wildly during the day, falling as much as 70% before closing down 56%. The Fed convened the parties and is facilitating their discussions. But The Financial Times reported that the Fed has not asked the two investment banks to man to provide $US70 billion in funding for AIG and had not suggested some sort of loan through intermediaries, such as the investment banks.
Meanwhile the credit rating of Washington Mutual was cut to junk status by Standard & Poor’s because of the worsening state of the US housing market.
S&P reduced its rating the Savings and Loan giant to three levels below investment grade.
“Increasing market turmoil and the related impact from managing its concentrated mortgage franchise in this troubled housing and credit cycle led to the downgrade,” S&P said in a a statement today as it cut its rating on the subsidiary bank to BBB- from BBB.
S&P’s move followed similar announcements last week from Moody’s Investors Service and Fitch Ratings.
The company has already reported reported $US6.3 billion of losses in the last three quarters and last Thursday said it expected to report another loss for the third quarter of $US4.5 billion.
Washington Mutual shares ended at $US2 this morning, down 27%, That was after a 36% fall last week.
And the huge industrial and financial group, General Electric, saw its shares down another 8% today, after a 5% fall on Friday, on fears its big money business would be badly hurt by the turmoil.
GE surprised by posting information on its website Sunday
“In response to questions we received on Friday and because of the extraordinary market conditions, we wanted to provide our investors with additional information on GE’s financial services businesses,” GE said.
GE’s financial services business said on its Web site that, as stated in GE’s second-quarter earnings call, the commercial real estate business will earn $US1.5 billion to $US1.7 billion in 2008.
And GE Financial Services said Sunday that in the first quarter, it purchased Merrill Lynch’s $900 million construction portfolio at a steep discount.
I agree. The idea that a country can do one thing well – like digging up iron – and buy whatever else it needs is a fantasy of market economists who forget that markets are themselves transient and delicate. When there is a severe oil or food shortage the price does not go up endlessly, it goes to a point where the market cracks and the product is not available at any price. Having been led down this path for 30 years, this country had better hope all future emergencies can be solved with iron and lanoline, because thats just about all we make for ourselves.
Chrys: I don’t wish to depress you even more than you seem in your comment. However, I’ve gotta say Australia began to lose all of its entrepreneurial spirit, all middle management skills, all systems of apprenticeships and all aspirations of a better future during the reign of Robert Gordon (pig iron) Menzies. And, as far as the coalition is concerned, it has been a steep ski slope (black) ever since. I’m not trying to whitewash the Labor Party, but until Kevin Rudd came along, no one thought of economics as being a Labor specialty. Whereas the Coalition was always ramming it down the voters’ necks, as to what good economists they were (do I hear ‘the world’s greatest treasurer’ being mentioned? Why bother training young people with special skills? It’s much easier to import skilled workers. Australia has a desperate need of brain power to ensure our financial stability. So what happens? As soon as someone has talent, they leave the country. Very few Aussies can cope with the thought that our mineral wealth can’t last for ever. Why does the share market have to reflect the shonky practices of the American financial system? You mention infrastructure; what infrastructure? Don’t you know that as long as there are endless footy matches, with another Olympics every fourth year, Australians will be more than happy. Ensure our ‘house’ cannot be repossessed? Give over, we sold the house, the farm, the back garden, the major shareholdings in our mining companies, some time around 1970-1980. And we have nothing to replace them.
This is the sordid truth about Australian irreverence and individualism.
This international unrest is exactly why australia should be as self reliant as possible.. the gov. should be supporting our manufacturing and farming infastructure.. and STOP selling off our energy and water!! I don’t mean for only their own value but , think out it, What do investors invest in? We would have more control over our/ more security in our share markets if our infastructure was secure.. Just look at the usa example.. their gov. had to bale out their two largest money lenders because they know there will be a domino effect. WHAT is our gov. doing to increase our resilience? A surplus of money is helpful..but only bandaid.. We must ensure our ‘house’ can not be repossessed …
P.S. I would miss Mr. Nelson at all.