Stocks Fall Sharply on Credit Concerns
By MICHAEL M. GRYNBAUM
New York Times
The selling on Wall Street began at the opening bell on Monday and only intensified as the morning went on. Shares moved sharply lower as the banking crisis tightened its grip on the global economy.
The Dow Jones industrial average fell below 10,000 for the first time since 2004 after losing more than 500 points in the first hour. The index has lost more than 1,100 points — or about 10 percent — in slightly more than a week.
Shortly after noon, the Dow was down 450 points or 4.3 percent.
The broader American stock market was down more than 4.9 percent, as measured by the Standard & Poor’s 500-stock index, its worst decline since last Monday’s 8.8 percent drop. At the same time, oil dropped below $90 a barrel.
The precipitous declines, which accelerated as the morning wore on, came a day after European governments were forced to scramble to save several major banks and lenders from collapse. The moves reinforced the global reach of the current crisis and alarmed depositors and regulators in the United States and abroad.
European stocks fell even further, with the major indexes in London, Paris, and Frankfurt down nearly 7 percent.
The sharp slides came despite a morning announcement from the Federal Reserve, which said it would significantly expand the amount of money it makes available to major banks. The Fed will now lend up to $900 billion in credit, an enormous sum that officials hope will reassure banks that the government will provide them with adequate capital.
The moves were aimed at resolving a problem at the center of the current credit crisis: the reluctance of banks to lend. The healthy functioning of the world’s economy is dependent on the easy flow of short-term loans among banks, businesses and consumers, a stream that has been cut off as banks become more fearful of giving out cash.
Borrowing rates remained very high on Monday despite the passage of the American bailout plan, although proponents of that package argue that its longer-term benefits will take time to carry out. Still, some gauges of anxiety in the market again reached record highs as the week began, and a benchmark overnight borrowing rate, the Libor rate, moved higher. A measure of volatility, the VIX index, jumped to its highest intraday level ever.
“It’s not just a question clearing problem assets,” said Bob McKee, chief economist for Independent Strategy, a research consultancy. “If banks don’t have enough capital they will be paralyzed.”
Oil prices tumbled nearly $4 a barrel to below $90, the first time it has fallen that low since February, before recovering slightly to $90.90 around 10 a.m. The euro continued to fall against the dollar.
Falling oil prices provoked a decline of just over 1,000 points, or nearly 9.9 percent, on the Toronto Stock Market. The drop brought the S&P/TSX index below 10,000 points for the first time since May 2004.
Energy stocks drove the decline, falling 13 percent. Financial industry shares were down 7 percent in mid-morning trading with the Royal Bank of Canada, the country’s largest bank, down 8.43 percent. That drop came despite the fact that the Royal Bank, like most of Canada’s major banks, has relatively little expose to troubled debt in the United States.
Strong prices for oil and gas as well as commodities like metals, have allowed most of Canada to escape the economic downturn in the United States. But the Bank of Nova Scotia report released on Monday said that weakness in the manufacturing sector, which relies heavily on exports to the United States, will push likely Canada into a recession.
In Europe, governments worked over the weekend to prevent the collapse of two lenders, Hypo Real Estate in Germany and the Belgian operations of Fortis. The German government also said it would guarantee all private bank deposits as it sought to avert the spread of the financial contagion.
The FTSE 100 index in London fell 5.6 percent; the Frankfurt DAX was down 5.2 percent and the CAC-40 in Paris lost 5.9 percent.
A similar sell-off occurred in Asia, the Nikkei 225 stock average in Tokyo fell 4.3 percent, while the Kospi index in Seoul fell 4.3 percent. The Standard and Poor’s/ASX 200 index in Sydney fell 3.3 percent, while the Hang Seng index in Hong Kong was down 5 percent.
“People are really disappointed by the inability of Europe to react on a concerted basis,” said Andrew Popper, a fund manager at SG Hambros in London. “It’s still very much a country by country approach. There is also a realization that we haven’t seen any effects on economic growth so far but that now is starting and that’s having an effect on non-financial shares.”
Steps by some European governments over the weekend to guarantee deposits may avoid a panic among consumers but will not help banks cope with their financing problems, said Adrian Darley, a fund manager at Resolution Asset Management in London.
“There are still a lot of issues out there,” Mr. Darley said. “Deposit guarantees are just a short-term solution. It does not necessarily help with interbank loans or if you have bad loans on your books. It will take a lot more than that.”
In Iceland and Russia, trading on banking shares was halted after indexes fell more than 14 percent.
Shares of industrial companies were hammered in Europe with EADS, the parent of Airbus, falling 7.5 percent, ArcelorMittal, the world’s biggest steel maker, falling 8.6 percent, and the German automaker Daimler down 5.8 percent. British Airways slid 10.3 percent.
BNP Paribas, which acquired a majority stake in Fortis for about $20 billion in an emergency deal late Sunday, was unchanged, while shares of Fortis were suspended. Trading in Unicredit, the big Italian bank, was delayed for an hour after the bank said late Sunday that it would seek about $9.1 billion in new funding and cut its earnings outlook. And Hypo Real Estate, the second-biggest German mortgage lender, fell 28 percent in Frankfurt after it received a new $68 billion bailout Sunday from German banks and the national government in Berlin.
Shares also dropped because many clients are pulling their money out of hedge funds and other investment funds with disappointing returns. “We’re seeing forced sales from redemptions,” Mr. Darley said.
Shares in HBOS, the British mortgage lender that agreed to be bought by Lloyds in a government-brokered deal, opened 20 percent lower on Monday.
Nicholas Bibby, an economist in the Singapore office of Barclays Capital, said that falling share prices showed that many investors were still worried that banking difficulties might spread even after the passage of the financial bailout plan in Washington. “It’s a fear of contagion,” he said, while adding that Asian banks were better positioned than most to withstand the current problems because the region’s high savings rate tends to mean that Asian banks are net lenders in international money markets.
Concerns about Asian exports have also been rising for months, as the region’s high savings rate means that it also has weak spending on consumption and remains heavily dependent on overseas demand.
CFC Seymour, a Hong Kong securities firm, pointed out in an investment newsletter on Monday that even before recent problems in financial markets, the combined trade balance of Japan, South Korea, Taiwan, Thailand, Indonesia and the Philippines had gone from a surplus of $19 billion as recently as last October to a deficit of $2 billion in July. Only China is still running consistently large trade surpluses.
The realignment in the currency markets that has lifted the dollar and yen against the euro continued, as investors worried about Europe’s banks and economic health and continued their flight to the apparent stability of Japan’s financial system.
The euro fell to $1.3609 in Paris morning trading, from $1.3772 in New York late Friday. The dollar fell to 103.42 yen from 105.32, and the euro declined to 140.74 yen from 145.07.
The Shanghai stock exchange, closed for the last week for China’s National Day holiday, reopened on Monday with the Shanghai A-share market down 3.5 percent. The China Securities Regulatory Commission announced on Sunday that it would experiment with the introduction of short-selling and trading on margin on a limited basis, but did not say when the trial would begin.
Keith Bradsher, Ian Austen, David Jolly and Julia Werdigier contributed reporting.
