Recovery will be slow and painful for everyone tied to it
THE slew of investments banks in the US that are either in trouble or have filed for bankruptcy is a worrying trend that has shaken global financial markets and dampened investors’ confidence.
The initial tangible signs that the US economy was in ill-health and likely headed for a major fall appeared about in February 2007 when home sales in the US began to fall drastically.
In fact, the plunge was the steepest since 1989, leading the US Treasury Secretary to call dub it the “bursting of the house bubble” and the most significant risk to the US economy.
That month and the next, over 25 subprime lenders declared bankruptcy.
But this, we now know, was just the tip of the iceberg, going by the number of high profile and large investment banks that have taken a dive, despite several prop-ups via interest rate cuts by the Federal Reserve (Fed) that proved only to be a stop-gap measure to the crisis.
The investment banks that went bust earlier included the largest US subprime lender then - New Century Financial. It filed for chapter 11 bankruptcy last April.
Barely four months later in August the world witnessed a global credit crunch as subprime mortgage-backed securities were discovered in portfolios of banks and hedge funds around the world: from BNP Paribas to Bank of China.
The European markets were also affected but to a lesser extent.
Meanwhile, more subprime lenders in the US such as American Home Mortgage and Country Financial Corp were tumbling or requesting funds to prop-up their organisations.
In March 2008, the US government tried to support Bear Stearns via Fed funding only to see it later being acquired by JPMorgan Chase for US$2 a share in a fire sale to avoid bankruptcy.
The Fed backed the deal to a tune of US$30bil to cover Bear Stearns’ losses.
And earlier this month, the US government bailed out mortgage giants Fannie Mae and Freddie Mac.
The latest to bite the dust is Lehman Brothers Holding Inc, the fourth-largest US investment bank, which filed for bankruptcy protection.
This time the Government has decided not to lend a hand, which does not augur well for the company.
The bankruptcy of Lehman Brothers and fears of more bank failures have US investors in jitters, which is reflected in the lacklustre performance of Wall Street, and deepening the credit crisis.
Monday’s trading on Wall Street saw the steepest sell-off since the lending crunch began as the blue-chip Dow Jones Industrial Average fell more than 500 points, or 4.4%, the biggest one-day drop since October 2002.
The broader Standard & Poor’s 500 Index plunged more than 4.7% — its lowest close since October 2005 and sharpest drop since the September 2001 attacks.
In Asia and Europe, stocks took a nosedive as fears of further bank failures in the world’s largest economy spread throughout global markets.
The latest financial firms under threat include bank Washington Mutual and American International Group Inc (AIG), the largest US insurer.
AIG reportedly needs to raise US$20bil in capital and sell another US$20bil in assets.
Local analysts and fund managers generally believe there is still more down side to the US credit crunch.
A fund manager with AmInvestment Bank said the US economy was still “fragile” and the road to recovery would be slow and painful for everyone tied to it.
http://biz.thestar.com.my/news/story.asp?file=/2008/9/17/business/2047075&sec=business
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