AIG Plunges 60%, Fearful Global Markets

123jump.com Staff
16 Sep, 2008
New York City

U.S. financial crisis deepened as Lehman Brothers filed for bankruptcy protection, AIG faces a severe credit test and liquidity crunch and Merrill Lynch was forced to sell the company to Bank of America. The Fed and the U.S. Treasury are finally sending clear signals to global markets and allowed Lehman to fall. Once unthinkable, talks of AIG bankruptcy intensifed ahead of the Fed rate decision tomorrow. AIG may need to raise as much as $75 billion in the short term.

5:00PM New York, 11:00PM Frankfurt, 7:00AM Sydney[R]– The U.S. financial crisis broadened as Lehman Brothers filed bankruptcy protection and AIG plunged 60%.[/R]

Global Markets

The U.S. financial landscape was drastically altered over the weekend as the credit crisis deepens. The slow motion crisis finally engulfed Lehman Brothers as it filed for bankruptcy. Merrill Lynch was forced to sell the company to Bank of America at a substantial discount. AIG hunts for cash but may come up empty handed as international investors stay away from the U.S. companies. European markets fell between 4% and 5% and few Asian markets that were open on Monday dropped 4%.

AIG ((AIG)) is facing a severe credit test and liquidity crunch as investors shy away from providing additional capital to the largest insurance company in the world by asset. The insurer with more than $1 trillion of balance sheet asset may face a rating downgrade on several of its mortgage related assets. AIG was permitted by the New York State Governor Patterson to seek $20 billion from its own subsidiaries and may have to $20 billion of assets. The insurer may still need another $30 billion to shore its capital base.

Investors appear skeptical of Bank of America purchase of Merrill and drive its stock lower by 16%. Merrill after rising as much as 30% gave up half of the gains and Bank of America stock accelerated its decline in the last one hour and fell 19%. AIG facing liquidity crunch declined 60% as it seeks emergency cash. Lehman Brothers fell 93% after it sought bankruptcy protection with $613 billion in debt.

European markets participated in a global sell-off as the U.S. financial crisis broadens. Lenders, brokerage houses and other financial companies declined in Europe and UK. Lehman Brothers after seeking bankruptcy protection in the U.S. was forced out from trading in energy and commodities trading in London. Separately, BASF agreed to acquire Ciba for Sfr 3.45 billion.

The financial regulator FSA in Japan ordered Lehman to retain assets at least equal to debt in the country. Separately, three banks in Japan have bank debt exposure of at least $750 million to Lehman. Over the weekend Lehman said that it intends to file for bankruptcy protection which was followed with a filing on Monday morning. Markets in Japan, China and Korea were closed.

Stocks in India and Asia declined as Lehman Brothers bankruptcy filing kept investors on the sidelines. Financial stocks in India and in the region fell as the U.S. financial crisis broaden. The U.S. regulators and the Federal Reserve scramble to arrange orderly fall of weak financial players. Merrill Lynch agreed to sell the company at near fire sale price to Bank of America. The software service providers fell sharply as more U.S. financial sector clients face troubles.

Stocks in Australia fell after Lehman Brothers decided to seek bankruptcy protection. The news rattled markets in Australia and few other markets that were open in Asia. Lehman Brothers, struggling for months to find a buyer finally was forced to seek protection as a deal with Korean bank unraveled. Australia suspends Lehman from the exchange membership.

North American Markets

Dow Jones Industrial Average decreased 504.48 or 4.42% to a close of 10,917.51, S&P 500 Index closed down 59.00 or 4.71% to 1,192.70, and Nasdaq Composite Index decreased 81.36 or 3.60% to close at 2,179.91. In Toronto TSX Composite closed down 515.55 or 4.04% to 12,254.03.

Of the 30 stocks in Dow Jones Industrial Average 1 stocks gained, 29 declined and none was unchanged.

Coca-Cola Company was the only the gainer in the Dow Jones Industrial Average with a rise of 0.46%.

AIG led decliners in Dow Jones Industrial Average with a fall of 60.79% followed by losses in Bank of America of 21.3%, in Citigroup Inc of 15.2%, in General Motors of 12.1%, in JP Morgan Chase of 10.13% and in American Express of 8.9%.

Of the stocks in S&P 500 index, 13 increased, 486 declined and 1 were unchanged. Of the index stocks, 71 rose more than 3% and 31 fell more than 3%.

Expeditors International led the gainers in the S&P 500 index with a rise of 2.65% followed by gains in Coca-Cola of 2.32%, in Consolidated Edison inc of 1.26%, in Pinnacle West 1.23%, in Applied Materials of 0.68% and in Mattel Inc of 0.52%.

Lehman Brothers led decliners in the S&P 500 index with a plunge of 94.25% followed by losses in AIG of 60.79%, in CIT Group of 30.79%, in WaMu Inc of 26.74%, in Wachovia Corp of 24.95%, in MGIC Investment Corp of 21.44% and in Bank of America of 21.31%.

South American Markets Indexes

Brazil led decliners in the region with a fall of 7.59% followed by decreases in Argentina of 5.19%, in Mexico of 3.79%, in Peru of 1.98%, in Venezuela of 0.7% and Chie of 0.67%.

None of the markets in Latin America region closed higher.

Europe Markets Review

In London FTSE 100 Index traded lower 284.30 or 5.25% to 5,132.40, in Paris CAC 40 Index decreased 236.80 or 5.47% to 4,095.86 and in Frankfurt DAX index traded lower 246.23 or 3.95% to 5,988.66. In Zurich trading SMI decreased 316.21 or 4.38% to 6,899.29.

Asian Markets Review

ASX 200 index in Australia decreased 86.10 or 1.76% to close 4,817.70. The KL Composite index in Malaysia decreased 12.40 or 1.19% closed to 1,031.63. Markets in Tokyo, South Korea and Hong Kong were closed today.

SET index in Thailand closed lower 11.95 or 1.83% to 642.39 and JSE Index in Indonesia decreased 84.81 or 4.70% to 1,719.25. The Sensex index in India decreased 469.54 or 3.35% closed to 13,531.27.

Commodities, Metals, and Currencies

Crude oil decreased $6.68 to close at $94.50 a barrel for a front month contract, natural gas increased 2 cent to $7.38 per mBtu and gasoline futures decreased 22.48 cents to close at 254.48 cents per gallon.

Gold increased $25.70 in New York trading to close at $790.20 per ounce, silver closed up $0.33 cents to $11.13 per ounce and copper for the front month delivery decreased 7.95 cent to $3.11 per pound.

Wheat futures closed up 7.75 cents in Chicago trading and closed at $7.27 a bushel. Sugar decreased 0.18 cent to 13.88 cents a pound. Soybean future closed down 23.00 cents to $11.79 a bushel.

Dollar edged lower against euro to $1.42 and edged lower against yen to 104.86.

Yields on U.S. bonds decreased to 3.43% with 10 years of maturities and decreased to 4.07% with 30-year of maturities.