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Wall Street Woes Intensify

16 September 2008 - Features - Editor

Following an eventful weekend in financial circles that saw two of Wall Street’s iconic firms, Lehman Brothers Holdings and Merrill Lynch, heading for disaster, traders quite justifiably faced Monday with trepidation. Add to this the fact that American International Group’s quest to raise much needed capital has essentially failed so far, and it is clear to see why investors are jumpy and the American public in general is feeling apprehensive.

During Monday’s trading, the Dow Jones Industrial lost a massive 504 points, or 4.4%, making it the biggest one-day percentage-basis decline since 19 July 2002 and the biggest one-day point-basis drop since 17 September 2001, the first stock market trading day following 9/11. The Standard & Poor’s 500 also experienced its worst day since 17 September, dropping by 4.7% on Monday, while the NASDAQ composite lost 3.6% being its biggest one-day percentage-basis decline since 24 March 2003. At one time the world’s largest insurer, AIG’s shares fell by 52 percent in composite trading at the New York Stock Exchange on Monday.

Cheap credit and growing property values were the driving force behind the significant growth in the financial sector over the past ten years or so. But in a complete turn-around, the companies that were thriving on mortgage loans and holding assets bought on credit are floundering. The sale of Bears Sterns to JP Morgan Chase, the imminent sale of 94 year-old Merrill Lynch to the Bank of America, and the bankruptcy of 158 year-old Lehman Brothers, has reduced the five most powerful New York-based securities firms that have dominated Wall Street for decades, down to two – Morgan Stanley and the Goldman Sachs Group. Although these companies are expected to report a drop in their third-quarter earnings at the end of September, they have both managed to remain profitable during 2008. However, this fact did not leave Goldman Sachs and Morgan Stanley unscathed in Monday’s stock market drama, as the fall of Lehman and Merrill sparked fears about their futures, resulting in a drop of as much as 7.9 percent in Goldman’s stock, while Morgan Stanley’s stock dropped by as much as 13 percent. Nonetheless, analysts generally agree that the two remaining Wall Street giants are capable of riding out the current storm.

Tuesday started off with some positive news when it was revealed that a group of ten leading domestic and foreign banks, including Barclays, Citigroup, Morgan Stanley and Goldman Sachs, have agreed to set up a lending pool of $70 billion to assist smaller financial institutions that run into trouble. Additionally the Federal Reserve has announced that it has plans to loosen up its tight lending restrictions to the banking industry.

The prevailing response of the many stock exchange traders, investors and investment analysts interviewed by leading newspapers and magazines, is that they have never experienced a day like Monday before, and the general consensus seems to be that life on Wall Street is entering a new era – but exactly where it is headed remains to be seen.

 


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