US stocks tumble
Stocks plunged on Wall Street today as investors remained worried about chaos in the US financial market even after the government forged an extraordinary $85bn (€59bn ) rescue of insurance giant American International Group.
The Federal Reserve’s emergency loan to shore up AIG, the world’s largest insurer and sponsor of Manchester United FC, temporarily lifted some uncertainty about the stability of the US financial system on Tuesday.
But the market later plummeted as investors kept a wary eye on the company, which is reeling from billions of dollars in souring mortgage debt.
The two Wall Street investment banks left standing after a week of stunning upheavals – Goldman Sachs and Morgan Stanley – also remain under scrutiny.
And the troubles in banking could exacerbate economic problems.
The Commerce Department said today that housing starts fell by 6.2% in August to the slowest building pace since January 1991.
The Dow fell more than 200 points in afternoon trading today. A 500-point drop on Monday marked the largest in the Dow Jones industrials since the September 11, 2001 terror attacks, as the venerable Wall Street giant Lehman Brothers filed for the biggest bankruptcy in US history.
Investors fear that a failure of AIG would set off even more financial turmoil than the collapse of Lehman.
“People are scared to death,” said Bill Stone, chief investment strategist for PNC Wealth Management. “Who would have imagined that AIG would have gotten into this position?”
He said the fear gripping the market reflected investors’ concerns that AIG was not able to find a lifeline in the private sector and that Wall Street was now worrying about what other institutions could falter.
The government was taking other measure to help alleviate the turmoil. The Treasury said it would start selling bonds for the Fed in an unprecedented effort to aid it with its lending efforts, while the Securities and Exchange Commission said it would strictly prohibit naked short-selling from tomorrow.
Short-selling is when traders borrow shares of a stock they expect to fall and sell them – if the stock does indeed fall, the traders buy the cheaper shares to cover the borrowed ones and profit from the difference.
Naked short-selling occurs when sellers do not actually borrow the shares before selling them; it is a practice some say is partially responsible for the huge drop in the shares of investment banks like Lehman, Merrill Lynch and Bear Stearns, which JP Morgan Chase & Co bought earlier this year.
Asian stock markets partly recovered today after the US bail out plan for AIG was announced, but later dipped as the news failed to persuade many investors that the financial turmoil would ease soon. European markets showed some optimism briefly, then fell lower for a third day.
On the campaign trail today, Republican presidential nominee John McCain told ABC’s Good Morning America he had not wanted the AIG bailout, but said millions of people whose finances were tied up in the company were in danger of having their lives destroyed.
He blamed greed, excess and corruption for AIG’s problems. He also said Congress and federal regulators had paid no attention to the problem.
Democratic rival Barack Obama blamed the Republican anti-regulatory fervour of recent years for part of the mess.
