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.

Peter Fray

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