The world financial system is in waters not travelled since the days of the Great Depression.  The no vote for the $US700 billion bailout in the US House of Representatives sent markets tumbling; except for the prices of gold and US treasury bonds and notes where investors fled to for safety

The shock vote sent world markets reeling; three more financial groups failed in Europe and the US and needed rescuing, on top of the three that were rescued at the weekend in Europe and the bailout of Washington Mutual on Friday in the US, which was the biggest bank failure in American history..

European shares fell to a three and a half year low and US markets were down to 2005 levels as well. It was the largest single points fall for the Dow, exceeding the slump in October, 1987, but not in percentage.

The Dow plunged by almost 700 points when it looked like rejection was likely; it then steadied, and plunged again at the close as it became clear there would be no move to re-work the vote.

  • The markets the steadied briefly, but in late trading returned to the slope and skidded past 700 points… the Dow finished down 770 points, or 6.92%, the S&P 500 fell 8.74% or more than 95 points. Nasdaq was off more than 9%. Financial stocks on Wall Street were battered lower. Central banks around the world prepared to inject another $US330 billion in a series of swap deals, involving Australia as well. That was on top of the $US290 billion revealed last week. This was announced at midnight
  • Our market will be down more than 300 points at the opening today with the ASX200 off more than 335 points in futures trading overnight, or 7%.
  • Oil fell $US10 a barrel to around $US96 a barrel, gold jumped to $US917 an ounce, up almost $US30 and copper slumped.
  • Gold then retreated to trade around $US894 an ounce in early Asian trading as investors realised that holding gold was OK, selling it would be tough if there were few buyers.
  • Copper lost more than 5% at one stage and fell well below $US3 a pound: it was trading around $US2.90 in early Asian dealings this morning.
  • Grains plunged, as did other agricultural commodities: wheat, soybeans and corn all fell 5% to 6.5% in Chicago.
  • The US dollar rose, the euro fell and the Australian dollar was weaker, finishing just over 80 US cents. It fell under that level in early Australian trading to be off more than 2.3 US events since the close in Sydney yesterday.
  • In the latest of a stunning series of rescues, the Belgium Government and the regional administrations in that country, are reported to have agreed to rescue the Dexia bank, a Franco-Belgian financial group. Dexia has a big funds management business in Australia. There’s no sign of a cost figure as yet, but local media said it could be as high as 7 billion euros, or close to $A12 billion. It came 24 hours after the Belgium Government was involved in the rescue of Fortis, which also has operations here. That will cost 11 billion euros for the Belgian, Dutch and Luxembourg governments.
  • Fortis, the Dutch-Belgium giant was bailed out, Hypo Real Estate, a big German property lender was also rescued by emergency funds from competitors and Bradford and Bingley in the UK was nationalised after parts were sold off to Santander. B&B’s $A110 billion mortgage portfolio was taken over by the UK Government and will be held with the mortgages from Northern Rock, the other UK bank nationalised in February…
  • The Icelandic Government took over Glitnir, the country’s third largest bank which had expanded via short term borrowings, setting off the biggest fall in the country’s stockmarket in its history and forcing an associated investment company and its biggest shareholder into administration, threatening a host of other companies. The government bought a 75%$ stake in the failed bank to keep it alive.
  • As the debate in the US Congress unfolded, Wachovia , the country’s sixth-largest lender, was rescued by Citigroup, with the US government take a $US12 billion stake in the country’s largest bank. The $US2.2 billion rescue takeover was clinched overnight after Wells Fargo, the other bidder, pulled out of the race. Citi will become the largest retail bank in the US with more than $US 600 billion in deposits and over 4,300 branches. Under the deal, Citi will absorb losses of up to $US42 billion on Wachovia’s $US312 billion portfolio of troubled mortgage and real estate assets, with the Federal Deposit Insurance Corp, a banking regulator, picking up the tab beyond that. However, in return for that cap on losses Citi agreed to give the FDIC a $US12 billion stake in the form of preferred shares and warrants that pay in return for a cap on any losses. Although the FDIC will not hold any voting rights, the arrangement could turn the government entity into one of Citi’s largest shareholders. It could be the first on a series of similar deals, much as was envisaged under the failed Paulson bailout plan. Citi, which will raise $US10 billion in equity and cut its dividend for only the second time since 1968 to help fund the deal. It also reported huge losses for the third quarter.
  • The German government bailout of Hypo Real Estate will cost an incredible €35 billion, or around $US55 billion.
  • Central banks , led by the Fed revealed more liquidity swaps around midnight last night, our time. A total of $US330 billion in swaps was done with major central banks to boost the amount involved since Lehman Brothers failed to a massive $US630 billion. The Fed also boosted its inter US domestic funding system called Term Auction Facilities to its banking system, increasing the amount to $US75 billion for each auction and revealing a total of $US350 billion in special auctions in November.
  • In Ireland banks suffered their biggest one-day fall in share prices in 20 years as nervousness grew about the stability of the country’s finjancial system. Fears swept the Dublin market about the ability of the country’s banks and other financial groups to withstand the downturn in the Irish economy amid the global financial turmoil. The Irish market ended up as one of the heaviest fallers in a day of sharp losses around the world with the benchmark index plunging 13% to take its loss so far in 2008 to over 52%.

Peter Fray

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