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Investors Remain Apprehensive Despite AIG Bailout

18 September 2008 - Markets - Editor

The Federal Reserve’s $85 billion life-line thrown to AIG late Tuesday, has done little or nothing to boost confidence in the U.S. financial sector. Wall Street experienced yet another nightmarish day on Wednesday as stock markets continued to tumble. Investors are extremely concerned that even government intervention may not be enough to stop the financial crisis from spinning out of control, and uppermost in many minds is the question of “Who will be next?”

The Dow Jones industrial average reported Monday that it had suffered its steepest one-day drop since 17 September, the first trading day following 9/11. But Wednesday saw the Dow losing another 450 points, or 4 percent, while financial stocks in the Standard & Poor’s 500 fell by 4.7 percent and NASDAQ fell by 4.9 percent. Insurance for corporate debt rose dramatically for Goldman Sachs and Morgan Stanley, the remaining two independent U.S. investment banks, and to make matters worse, the short-term credit markets remain stagnant. Moreover, interest rates for overnight inter-bank loans as well as overnight loans to businesses soared. This may be attributed to the fact that on short-term loans it is often difficult to establish who the ultimate borrower is, so it appears that banks would rather hold on to their cash than to lend it to a potentially risky client.

The U.S. Treasury Department and the Federal Reserve have been involved in a series of “firsts” since the Bear Sterns intervention, the latest being that for the first time in Treasury Department history it has announced that it would begin selling bonds for the Federal Reserve in order to assist the central bank to deal with the current unprecedented borrowing pressure. It hastens to assure the public that this is not an indication that the Fed is short on cash, but is merely an efficient way for the government to manage its financing needs.

While the faltering economy and the shaky banking system is understandably of intense interest to stock market players, it is fast becoming an unavoidable and unnerving topic for discussion at American dinner tables, social events, bars and online, while continually providing fresh ammunition for debate and finger pointing for both parties on the American campaign trail.

 


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