Financial Market Update: After the Closing Bell- Tuesday, Oct. 7
- Oct 07, 2008
Oops, there go another 500 points, or 5.11 percent, off the Dow. Only a year ago, the Dow Jones Industrial Average hit a peak of 14,164.53; since then, it has lost fully 33.3 percent. Other indexes lost a lot of ground as well: the Nasdaq lost 5.8 percent and the S&P 500 lost 5.74 percent. Part of the stock-value decline was due to a rumor that Mitsubishi UFJ Financial Group was chickening out of a deal to acquire as much a quarter of the voting shares of Morgan Stanley–which sent the former investment bank’s stock down by about 25 percent. In real estate, share prices of General Growth Properties Inc., the No. 2 mall REIT, cratered today, losing 42 percent of its value, down to $4.50 a share. GGP’s problems involve the suspicion that it won’t be able to refinance its $1.2 billion in debt. All together, it’s been a bad year for retail and retail property owners. The Bloomberg REIT Retail Index, which tracks 27 REITs, has lost 47 percent since this time last year. It was down 9.9 percent just today. Today’s column by Joe Nocera of the New York Times business section was titled “On the Theory That Punching Dick Fuld Will Help Solve the Credit Crisis.” Interesting theory, Joe.Running your company into the ground is stressful, so executives of insurance behemoth AIG recently spent a week at St. Regis Resort in Monarch Beach, Calif., according to Rep. Henry Waxman (D-Calif.), whose committee is busy assigning blame for the financial crisis. The tab for pampering AIG’s top talent was about $440,000. That only goes to show that a mindset is a difficult thing to change. Until very recently, that sum was petty cash on Wall Street, used for flowers on Administrative Assistants’ Day and doughnuts for the office on employee birthdays. The Federal Reserve intends to set up a special fund to lend directly to businesses that are finding it hard to borrow due to the timidity of banks in the current climate. The fund will be prosaically known as the Commercial Paper Funding Facility, and will buy three-month unsecured commercial paper. Both the Fed and the U.S. Treasury will fund the entity. The move represents something new in government intervention in the economy–part of the new New Deal?–and comes on the heels of the Fed pushing an additional $900 billion into the U.S. banking system, which represents a six-fold increase in its lending to banks. The message to banks: stopping putting your money in mattresses. Then again, it’s impossible to say that the U.S. banking industry hasn’t been burned to the point of paralysis, even if it’s self-inflicted. The International Monetary Fund, in its semiannual Global Financial Stability Review, estimates that the U.S. banking system has lost $1.4 trillion because of the current crisis. In a classic of understatement, the I.M.F.’s managing director, Dominique Strauss-Kahn, said that the number “shows how serious a crisis we currently face.” More bad news for banks: the Federal Deposit Insurance Corp. is proposing to double the fees that it charges banks to insure their deposits, in a move to replenish the agency’s reserves in light of the government’s recent pace of bank seizures. The proposal would add $10 billion annually to the insurance fund, which had $45.2 billion as of June 30, which represented a drop of 14 percent during the second quarter of 2008. In effect, the increase will punish healthy institutions for the mistakes of various careless ones, which is fairly much a microcosm of the entire financial crisis. But the banking industry could well have a plan to recoup the new expenses, by doing what it always does: raise fees for its customers. Countrywide Financial, these days a unit of Bank of America, has reached agreements with a number of state attorneys general to provide mortgage relief. The agreements come as the result of lawsuits filed by Illinois, California, Connecticut and Florida, plus complaints by seven other states, that alleged abusive lending practices back during the freewheeling early- to mid-2000s, when the main qualification for getting a mortgage was being able to fog a mirror. Under the terms of the settlements, roughly 400,000 homeowners will get relief valued at $8.4 billion. Bank of America itself hasn’t had a very good time of it this week either, after reporting on Monday evening that its quarterly net income fell 68 percent from the previous year. The bank also cut its dividend in half. As of mid-day today, its stock was down 15 percent. And where are investors who are getting out of financial stocks putting their money? Presumably the same mattresses as the banks themselves. In the Euro-zone, an assortment of finance pooh-bahs meeting in Luxembourg for several days have failed to agree on what to do about the crisis in Europe, though they did propose to raise the minimum guarantee on household bank deposits to about €50,000 (U.S.$68,000) across the entire 27-nation E.U. Though not in the Euro-zone and only peripherally in Europe, the European nation that has taken things the hardest thus far seems to be Iceland. Today the country nationalized its second-largest bank, Landsbanki, the day after the Icelandic central bank turned to Russia (of all places) for a loan of €4 billion. Generally unnoticed by much of the rest of the world, Icelandic banks went on an acquisition spree in recent years in Europe and thereby exposed themselves to the same credit problems as the rest of the world.