Crikey

Our market was off 3% in early trading, the Aussie dollar was trading around 72 US cents, down six cents since Friday, but up almost 4 US cents from the lows hit overnight. Oil was under $US89 a barrel, copper was down, as were all other commodities, except gold. That was a five and a half year low on the Aussie dollar overnight, one also shared by the Kiwi currency.

In the US, the Dow Jones Industrial Average fell below the 10,000 point mark for the first since since 2004, while the Nasdaq tumbled nearly 5%. It was the biggest drop since Black Monday, 1987. The Guardian reports:

In six business days, the Dow has slumped by 11% - a fall kicked off by last Monday’s record dive of 777 points. The Federal Reserve tried to shore up financial stability on Monday by doubling the amount of money available for short-term lending to banks from $300bn to $600bn.

The crisis shows no signs of abating in the US and is spreading beyond Wall Street. Two major state governments - California and Massachusetts - have now warned they may need loans from the federal government to tide them over.

The Russian stockmarket halted trading three times to slow the speed of share selling. The main index lost over 18%.

The Telegraph reports that “Brazil shut the Sao Paulo exchange after the Bovespa index crashed 15pc in panic trading”

The London stock market fell more than 7.8%, it’s biggest fall since 1987, and the third worst percentage loss at closing in history.

France’s CAC recorded its largest ever drop with more than 9% being wiped off the market’s value. The CAC 40 fell 368.77 points, or 9.04 per cent, to 3,711.98 points.

In Germany, the benchmark DAX was down 410.02 points, or 7.07 per cent, at 5,387.01 points.

Japan’s Nikkei and Topix indexes fell to their lowest levels in almost five years. The Nikkei dropped 4.25%, with the Topix falling 4.67%. The market opened much lower today, down 5.3% in the first hour of trading.

Bank of America:

• Will cutt dividend by 50% and raising $US10 billion in new capital. That was after a 68% drop in third quarter earnings.
• The earnings report showed earnings of $US1.8 billion in the quarter, ($US3.7 billion a year ago) a comparison made harder by the fact that the third quarter last year was close to the all time peak for financials. The news was a shock because just over two weeks ago, Bank of America was the rescuer of Merrill Lynch.
• But it was the comments by the bank’s head, Ken Lewis, who said in the earnings release: “These are the most difficult times for financial institutions that I have experienced in my 39 years in banking. It is prudent to raise capital to very substantial levels in this uncertain environment … Both economic and financial market conditions have changed significantly in the last two months.” Lewis said that “recessionary conditions” and the outlook for an even weaker economy will drive up credit losses and depress earnings, a warning that we will see come true for hundreds of major US companies on the S&P 500 as they start their reports for the third quarter tonight.

Meanwhile, in Iceland:

• Iceland remains the focus in Europe. Trading was suspended in banks, financial stocks and guaranteed bank deposits, joining Denmark, Ireland, Germany, Italy and Greece in doing so.
• But banks heavily sold the citizens and businesses foreign currency loans at low interest rates in recent years (shades of our Swiss Loans Affair in the 1990s). The plunge in the kronor, the country’s currency, has seen the size and cost of those loans balloon: the currency shed 20% last week alone after the bailout of the third largest bank, Glitnir.
• The country has around $A180 million to cover billions of dollars of bank deposits (more than $A30 billion by some estimates). Many of those deposits are from people in other countries. These cross border deposits are a minefield and some may or may not be covered by the spreading regime of individual Government guarantees.
• In a national speech overnight, the country’s Prime Minister Geir Haarde warned that the country was threatened with “national bankruptcy” from the credit crisis as he introduced emergency legislation to give the government sweeping new powers over the financial sector.
• Iceland could be the first country to go broke in this crisis. It may need bailing out, not the banks which the Government and the authorities allowed to borrow short and lend domestically and internationally.

How the pundits see it

The bailout has not worked. It’s official! The bank bailout has not worked. Global stock prices are in a panic rush to the bottom. The bank bailout cannot fulfill its primary mission to restore investor confidence, because it does only half the job. – Business Spectator

Words to calm the woozy investor. There’s only one word for this market — and it’s on everyone’s lips from London to San Francisco: “Aaaaaaaaaaaaarrrrggghhhh!” It’s times like these you can’t get your broker on the phone. But don’t worry — he’s not avoiding you. He’s avoiding everybody – Wall Street Journal

America and the New Financial World. In 1945, after an exhausting three decades of exertion against Germany, the United Kingdom emerged militarily victorious only to see itself economically exhausted. A year later, it was bankrupt, unable to find capital and on the verge of collapse. It had nowhere to turn but the U.S., which then dictated terms that amounted to a withdrawal of Great Britain from the world stage. The U.S. is not yet in the position of Great Britain, and our creditors in China are not yet as we were then. But absent a more humble and realistic attitude toward capital in Washington, that is the path we’re headed down. — Wall Street Journal

Fuld faces the music. Former Lehman Bros Chief Executive Richard Fuld, speaking to the House Oversight and Government Reform Committee: “Nobody, including me, anticipated how the problems that started in the mortgage markets would spread to our credit markets and banking system and now threaten our entire financial system and our country … Based on the information I had at the time I believe that [our] decisions and actions were both prudent and appropriate. With the benefit of hindsight, would I have done things differently? Yes, I would have.” – New York Times

Iceland’s economic situation worsens. Iceland risks plunging into national bankruptcy, Geir Haarde, the country’s prime minister, warned on Monday as a mounting financial crisis and a 30 per cent dive in the krona forced the government to take emergency action. The ruling alliance and opposition parties united to approve legislation that gives the state sweeping powers over Iceland’s battered banks including the option of nationalising them and sacking executives … “We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy,” he said. “The legislation is necessary to avoid that fate.” – Financial Times

Germans sceptical about bailing out the rest of Europe. [German] Finance Minister Peer Steinbrück ruled out his country’s participation in a broader European effort to help other faltering banks. “The chancellor and I reject a European shield because we as Germans do not want to pay into a big pot where we do not have control and do not know where German money might be used,” he said in a radio interview. – International Herald Tribune

Is it 1929 again? Watching the slipping economy and Congress’s epic debate over the unprecedented $700 billion financial bailout, it is impossible not to wonder whether this is 1929 all over again. Even sophisticated observers invoke the comparison. Martin Wolf, the chief economics commentator for the Financial Times, began a recent column: “It is just over three score years and ten since the [end of the] Great Depression.” What’s frightening is not any one event but the prospect that things are slipping out of control. Panic — political as well as economic — is the enemy. – Robert J Samuelson, Washington Post

The fall of America Inc. The implosion of America’s most storied investment banks. The vanishing of more than a trillion dollars in stock-market wealth in a day. A $700 billion tab for U.S. taxpayers. The scale of the Wall Street crackup could scarcely be more gargantuan. Yet even as Americans ask why they’re having to pay such mind-bending sums to prevent the economy from imploding, few are discussing a more intangible, yet potentially much greater cost to the United States—the damage that the financial meltdown is doing to America’s “brand.” – Francis Fukuyama, Newsweek

We must prevent a greater loss of confidence in the banks. Why have the prophets of doom been proved right, while the relative optimists, myself included, been proved wrong? Is it because house prices have suddenly fallen faster than expected or banks have suddenly discovered more bad mortgages on their books? On the contrary, the US economy and housing markets have stabilised over the summer, consumer confidence improved as oil prices corrected and credit losses on US housing have remained about $550 billion, a modest amount in relation to total US mortgages worth more than $11,000 billion. What, then, has suddenly gone wrong? — Times Online