Published September 16, 2008

Nightmare on Wall Street spooks markets worldwide


(SINGAPORE) Stocks worldwide plunged yesterday after the worst weekend on Wall Street in recent memory spelt the end for two of its biggest and oldest banking names.

As news of the collapse of Lehman Brothers and the extraordinary takeover of Merrill Lynch spread, markets in everything from stocks and currencies to credit derivatives strained to cope with the fallout. Stunned investors fled equities for the relative safety of government bonds and traditional safe-haven commodities such as gold.

Central banks in the US, Europe and Australia promised to expand emergency lending measures or inject more funds into financial markets to bring down interbank lending rates and cushion the impact of Lehman's failure. China's central bank cut interest rates and lowered the reserve requirement for banks to ease borrowing costs.

In Singapore, the Straits Times Index fell 3.3 per cent led by banking stocks - the biggest percentage decline since March 13, when the index slid 3.9 per cent.

The damage to Asian equities would have been even more widespread, but markets in Japan, Hong Kong, mainland China and South Korea were closed for public holidays.

Stocks in Europe opened with big losses led by financial sector stocks. By day's end the FTSE-100 share index in London was down 4 per cent at 5,204.2 points, the sharpest one-day percentage fall since January.

In the US, the main equity indices started with big losses yesterday, with the Dow Jones Industrial Average down more than 2 per cent in the first 30 minutes of trading. By midday, the Dow was down 316.56 at 11,105.43 points.

'It's a financial disaster. We're in the middle of a severe financial and banking crisis and it's going to get worse,' Nouriel Roubini, chairman of consulting firm RGE Monitor and a professor of economics at New York University, told Bloomberg in a television interview.

Mark Mobius, executive chairman of global fund manager Templeton Asset Management, was more optimistic. Also speaking to Bloomberg, he said: 'We're probably now at the bottom and it'll be a build up of confidence from here on in, if these decisions are made.'

Ten major banks including Citigroup, Credit Suisse, Deutsche Bank, JP Morgan and UBS agreed to create a common liquidity pool worth US$70 billion that each could draw on in emergencies to weather the crisis triggered by Lehman's demise.

The International Swaps and Derivatives Association or ISDA arranged a four-hour emergency trading session on Sunday afternoon in New York for firms to reduce their exposures to Lehman in a broad range of over-the-counter derivatives such as interest-rate and credit-default swaps, to prevent a chaotic meltdown when regular trading resumed on Monday.

Despite that, indices tracking the spreads on corporate credit-default swaps - a measure of the risk of the underlying companies defaulting on their debt - jumped sharply in Europe and the US yesterday as traders worried that the bankruptcy filing by Lehman, one of the top 10 dealers in the credit-default swaps market, would trigger massive losses for other firms as its trading positions are unwound.