Financial Crisis Continues

I have been trying to follow events on Wall Street all day. It has been an extraordinary experience. For those of you who are only peripherally aware of what’s going on it’s hard for me to put the right words together. I suppose melt down will have to do. As of midday the stock market had found a floor to its decline at around a drop of 250 points from the opening. That would have been reasonable for the day as a whole given the roiling chaos in the banking world. But as the news failed to improve the market losses gathered steam and the Dow closed just over 500 points down.

Amidst the torrent of bad news we have learned that the New York State Insurance regulators have granted AIG a $20 billion ability to borrow from its own subsidiaries in order to bolster its capital. Earlier AIG’s stock price had plunged 60% on rumors that it might be downgraded by the rating agencies, a downgrade would have the effect of requiring AIG to carry more capital which it would have difficulty raising given the precarious nature of its balance sheet. Here’s the New York Times update on AIG:New York Allows A.I.G. to Lend Itself Money

The shocking news here is hidden in the fine print: other, non-financial firms like General Electric are also having difficulty raising capital for their financial subsidiaries. So they are being tempted to seek government aid also. Were they to try, it would represent a massive breach of prior rules and could potentially spread the effects of the credit crunch deeper into the economy. Many of these non-financial companies use financial subsidiaries as a way of supporting sales [think of the old GMAC]. To the extent that these subsidiaries are exposed to the vagaries of the credit crunch they will be less able and willing to lend … the result will be an extension of the slow down into the consumer sector. The consequence of that would inevitably be a drastic curbing of GDP growth at a time when growth is already fragile.

So after the first day of this new crisis where are we?

Amid uncertainty and gloom.

The loss of Lehman’s jobs will hit New York and London hard [although London seems better placed to weather the hit]. The two remaining large dealers: Goldman and Morgan Stanley have had their stock prices slammed today. they are now much weaker and there has to be medium term doubt about their ability to survive.

This tumult is incredible. As a participant in the markets a few years ago I worked with all these firms. Now they are all gone or look as if they will go. The banks left standing are the huge European style mega banks: here in America it will be Citibank, Bank of America, and JP Morgan Chase. In Europe it will be Barclays, HSBC, Deutsche Bank and so on. The landscape has changed forever.

All I can say at the moment is … wow!