Thursday, September 18, 2008

U.S. Financial Crisis Leads to Global Financial Collapse

The worst financial crisis since the Great Depression has forced the Federal Reserve (the Fed) and central banks in other countries to inject billions of dollars into the world's banking system in an urgent bid to cut total global financial collapse.

The Fed injected as much as $180 billion into money markets overseas. Meanwhile, in the domestic area, the New York Federal Reserve acted to ease a spike in overnight lending rates by injecting $55 billion into the banking system. On the other hand, Wall Street initially rallied, but trimmed gains as the morning wore on.

U.S. President Bush has canceled an out-of-town trip to stay in Washington and to huddle with Treasury Secretary Henry Paulson. Bush pledged to do all that was necessary to stem the financial crisis, whose fallout threatens the already fragile economy. Moreover, things have been getting worst, because the government has failed to stabilize and strengthen the financial markets and improve investor confidence.

Although the Fed has made its movements due to overseas counterparts, which is aimed to boost warning confidence and getting banks around the globe to open their ever-tightening purse string, it still cannot change the financial disaster that made by the large financial companies that have been predicted to go to bankruptcy. The financial institutions, especially banks, have been increasingly reluctant to lend to each other as distrust spread throughout the financial system.

A huge growth in borrowing costs has worsened as bad bets on dodgy mortgage-backed securities claimed more Wall Street monsters. The total amount of commercial paper fell by $52.1 billion for the week that ended Wednesday, as banks cut back the short-term loans companies from small garment factories to General Electric Co. depend on for their daily operations. Meanwhile, at the same time, the interest rate on those short-term loans more than doubled, with rates for seven-day paper jumping to 4.5% from 2.5%. Moreover, the Asian markets closed lower, but the action by central banks helped send European stocks higher after three days of losses.

Russia closed its stock exchanges for a second day Thursday as President Dmitry Medvedev pumped a 500 billion ruble ($20 billion) into financial markets to stem a dizzying plummet in share prices, and quash fears of a repeat of the country's 1998 financial collapse.

Wall Street was mixed after dropping 450 points Wednesday when a Fed bailout of American International Group Inc. (AIG), one of the world's largest insurers, failed to settle the markets' frayed nerves. However, worries that other financial companies could fail cast a pall on the central banks' step that spread billions of dollars around the world in exchange for foreign currencies. Investors were still pouring into Treasury securities and gold, traditional safe-havens in times of turmoil.

The U.S. president was to meet with economic advisers over much of the day, and was seeing Treasury Secretary Henry Paulson at the White House later Thursday. Undoubtedly, the U.S. financial market is dealing with a serious collapse, and the U.S. is facing unbelievable challenges.

The Fed had authorized the expansion of swap lines, or reciprocal currency arrangements, with the other central banks, including amounts up to $110 billion by the ECB and up to $27 million by the Swiss National Bank. Moreover, the Fed also had new swap facilities that had been authorized with the Bank of Japan for as much as $60 billion, $40 billion for the Bank of England and $10 billion for the Bank of Canada. In addition, Fed action increased lines of cash to central banks by $180 billion to $247 billion.

More than a year, investors around the globe have watched with growing alarm as the U.S. economy, the world's largest, has strived to right itself before being tipped over the edge by massive foreclosures, shrinking consumer spending and rising inflation that lead to financial collapse. Moreover, the turmoil has swallowed some of the most storied names on Wall Street. Three of its five major investment banks such as Bear Stearns, Lehman Brothers and Merrill Lynch that have either gone out of business or been driven into the arms of another bank. In addition, the two remaining, Morgan Stanley and Goldman Sachs Group Inc. were under siege.

On Wednesday, financial stocks in the Standard & Poor's 500 dropped 10%, and insurance that backs corporate debt soared for Goldman Sachs and Morgan Stanley. Shares in the sector were flat Thursday.

On the other hand, the Dow Jones industrial average that only two days earlier had suffered its steepest drop since the days after the Sept. 11 attacks lost another 450 points. About $700 billion in investments vanished and trading volumes set new records. Meanwhile, shares of the nation's largest thrift, Washington Mutual Inc., fell 13%. The government was trying to find a buyer for the bank that has been battered by bad mortgage exposures. It lost $3.3 billion in the second quarter.

Demand for super-safe Treasuries surged Wednesday, sending the yield on the 3-month Treasury bill briefly into negative territory for the first time since 1940. That meant investors were willing to pay more for certain Treasury securities than they expected to get back when the investments matured, which is a rare event.

It was the fourth consecutive day of extraordinary turmoil for the American financial system, beginning with news on Sunday that Lehman Brothers, would be forced to file for bankruptcy. In addition, after the government bailed out the insurer AIG and a money fund "broke the buck," investors were worried about the potential risk of most assets.

The 4% drop Wednesday in the Dow reflected the stock market's first chance to digest the Fed's decision to rescue AIG with an $85 billion taxpayer loan that effectively gives it a majority stake in the company. AIG is definitely important because it has essentially become a primary source of insurance for the entire financial industry all over the globe.

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