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WASHINGTON: Wall Street will never be the same after a week that saw
the White House, abandoning its laissez-faire attitude toward
markets, organize an unprecedented bailout of private companies.
The massive measures the government has
announced to restore stability to the US banking system could cost
up to $1 trillion, including the $700 billion for the rescue of
financial firms confirmed on Saturday.
To put that staggering price tag in perspective,
the cost would amount to six months of economic output in a country
like France.
But confronted with the worst financial crisis
since the 1929 market crash that ushered in the Great Depression,
did the Republican administration of President George W. Bush have
any choice?
In the middle of the week, the huge US banking
system was teetering on collapse: its lifeblood—cash —no longer
circulated; its pulse, measured by short-term interest rates, was
spiking.
The morphine injected in massive
doses—liquidity infusions by central banks—no longer had an
effect.
An emergency operation was needed to remove the
cancer at the heart of the global financial crisis.
The United States “may be days away from a
complete meltdown of our financial system,” said the influential
Democratic senator, Chris Dodd, who chairs the Senate Banking
Committee.
On Thursday, Treasury Secretary Henry Paulson
announced the broad outlines of a landmark plan proposed to Congress
in which the government would buy toxic assets from financial
institutions accumulated during the US real-estate boom and which
since soured in the worst housing crisis in decades.
In other words, the federal government would
become the biggest hedge fund on the planet. That would follow the
government’s seizure of the ailing mortgage-finance titans Fannie
Mae and Freddie Mac and the nationalization of the largest US
insurer, American International Group (AIG), two extraordinary
actions in a country where the state shareholder does not exist.
“Welcome to the USSRA—the United Socialist
State Republic of America,” said economist Nouriel Roubini, a
former advisor in Bill Clinton’s Democratic administration.
Paulson, a former Goldman Sachs president, said
it was time to end piecemeal attempts at addressing the crisis and
attack it at its roots. He said the administration and Congressional
leaders would work all weekend to craft the necessary legislation.
Much had changed since the start of the week.
Sunday, September 14: the senior officials
responsible for the US economy still think they have things under
control.
After three days of frantic discussions, Paulson
and Federal Reserve chairman Ben Bernanke hold their ground and
refuse to bail out Lehman Brothers, buffeted by savage attacks on
its share price amid rumors it would collapse.
The fourth-largest of the Wall Street investment
banks, they argue, does not pose a “systemic” risk; its failure
should not trigger a cascade of other bankruptcies in the
international financial system.
Lehman files for bankruptcy protection Monday.
Rather than face the same fate, its prestigious Wall Street rival
Merrill Lynch hastily arranges a takeover by Bank of America. Wall
Street loses 504 points (4.42 percent), one of its steepest one-day
declines since the September 11, 2001 terror attacks.
Insurer AIG, a component of the Dow’s 30
blue-chip index, sees its shares plunge. A banking consortium that
was trying, under pressure from US authorities, to put together an
enormous credit lifeline to help AIG get through its difficulties,
takes fright and gives up.
The Federal Reserve is forced to make an
about-face and open an $85-billion line of credit to AIG, in
exchange for 79.9 percent of its capital.
The reason: in addition to its traditional role
of insurer, AIG had guaranteed hundreds of billions of dollars’
worth of financial products whose value had plunged. There is indeed
a systemic risk, the Fed concludes.
By Wednesday, equities investors panic. They
withdraw massive amounts of investments and put them into
traditional safe havens.
Gold registers its sharpest dollar climb on
record, a leap of $88.75, and the yield on US Treasury bonds falls
practically to zero.
The country’s oldest money market fund—a
type of investment considered very low risk—announces that it is
no longer able to redeem investments at the value they were bought.
Turmoil rages on the global markets, threatening
to swamp other financial institutions like Morgan Stanley and
Washington Mutual. The British bank HBOS agrees to be swallowed up
by its rival Lloyds TSB. And Moscow’s two stock exchanges, in the
throes of a meltdown, are closed.
After another grim day Wednesday, a crash seems
inevitable Thursday on Wall Street until rumors of a massive
government rescue package being prepared begin to surface.
Confirmation of a government plan sends global
stock markets roaring higher, with Paris and London indexes posting
record one-day gains of 9.27 percent and 8.84 percent, respectively.
But could lawmakers’ squabbling delay putting
Paulson’s massive bailout into action?
“If it doesn’t pass, then heaven help us
all,” Paulson was quoted as saying by The Wall Street Journal on
Saturday.
-- AFP
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