Billions of dollars, euros, pounds and yen were wiped off the world’s stock markets yesterday, as they reacted to the emergency bail-out of US investment bank Bear Stearns on Sunday.
At a press conference on Sunday evening, the JP Morgan Chase bank announced that it had purchased Bear Stearns for the rock bottom price of $2 a share – $236m.
In an event not seen since the great depression of 1931, the US central bank, the Federal Reserve, is guaranteeing Bear Stearns’ risky assets to the tune of $30bn.
One analyst, Peter Boockvar, equity strategist at Miller Tabak in New York, commented: ‘When you see the Fed relying on tools that haven’t been used since the Great Depression, it’s alarming.’
The Fed on Sunday also cut the discount rate, at which banks lend money to banks, from 3.5 per cent to 3.25 per cent, and offered to buy up the assets of other troubled banks.
In New York yesterday, the key Dow Jones Industrial index fell 194 points, more than 1.5 per cent, in the first minutes of trading.
The share prices of US banks were hammered in pre-market trading, with Lehman Brothers down a huge 30 per cent.
The bank rushed out a statement, saying: ‘Our liquidity position has been and continues to be very strong.’
US President George Bush tried to reassure investors, telling a press conference yesterday that the US authorities were ‘on top of the situation’ and ‘when need be, will act decisively, in a way that continues to bring order to the financial markets.’
He claimed unconvincingly: ‘In the long run, our economy is going to be fine.’
On the London stock exchange, the FTSE 100 index was down 2.7 per cent by midday, in Paris the Cac 40 slumped 2.9 per cent and the Dax index on Germany’s Frankfurt exchange fell 4.1 per cent.
The share prices of European banks were badly knocked down, with shares in the Swiss bank UBS plunging 13.1 per cent, France’s Societe Generale shares down 9.1 per cent, and Germany’s Commerzbank down 7.9 per cent.
Meanwhile, Asian stocks also fell, with the Nikkei average index in Tokyo closing 3.7 per cent lower and Hong Kong’s Hang Seng index slumping 5.2 per cent.
The Indian Sensex index was down 6.5 per cent.
The Bank of England on Monday made an extra £5bn available for banks to borrow.
Such was the queue that the funds were five times over-subscribed.
The crisis saw the dollar’s slide continue, with the US currency hitting new lows against the euro and the yen.
At one stage yesterday morning the euro was trading at $1.5904.
The dollar also weakened to 95.72 yen, its lowest since August 1995.
There will be a huge run on the dollar when the Fed makes an expected one per cent cut in its general interest rates today.
Meanwhile, the price of gold soared beyond $1,000 an ounce, with it spot price briefly hitting a record $1,030 an ounce.
Oil prices also shot upwards, with Texas sweet crude climbing to a new high of $111.80 a barrel.
The London FTSE-100 index closed 201 points down and some £44 billion lighter.