US financial crisis sends shock waves across the world (Fourth lead)

September 15th, 2008 - 10:45 pm ICT by IANS  

Barack ObamaWashington, Sep 15 (IANS) The American financial system was in turmoil Monday sending shock waves across the world as two of the world’s biggest banks tumbled with one filing for bankruptcy protection and other agreeing to be sold.Lehman Brothers Holdings Inc. filed for bankruptcy protection under Chapter 11 of the US Bankruptcy Code early Monday morning while Bank of America Corp, the country’s largest consumer bank, struck a $50 billion deal with Merrill Lynch & Co Sunday.

Stocks on Wall Street plummetted just after the opening bell Monday morning with the Dow Jones industrial average dropped more than 300 points in just under 10 minutes of trading.

The Dow had recovered slightly after 10 a.m., with the blue-chip index down about 250 points, or 2.2 percent. Shares of financial stocks fell, but have not neared their lows for the year, set in July. So far, American stocks were reported to be performing slightly better than those in Europe.

The crisis came to a head over the weekend with the US government, which a week ago had bailed out Fannie Mae and Freddie Mac and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, refusing to provide a financial backstop to potential buyers.

However, fearing a meltdown in the housing and mortgage market, the Federal Reserve is expected to take new steps to stabilise the broader financial system making it easier for banks and securities firms to borrow from the US central bank by using a wider range of collateral.

As the financial crisis hit the headlines, President George W. Bush prepared to make remarks on the crisis on Wall Street, the latest fallout from the storm that struck last year with the sharp decline in American housing prices and losses on loans and other assets tied to home values.

The two presidential candidates, Democrat Barack Obama and Republican John McCain made moves to put on centre stage an issue that has largely been absent on the campaign trail.

In a statement early Monday morning, Obama said the market meltdown showed the need for more government regulation after a quarter century of steady deregulation in Washington, a trend intensified under Bush.

But McCain applauded the government’s restraint in declining to bailout out Lehman Bros. and called for regulatory reform for financial markets.

The imminent disappearance of Lehman Brothers and Merrill Lynch was expected to hit an already tough job market with experts suggesting up to 50,000 more jobs may be lost in the US financial services sector that has already lost more than 100,000 jobs this year.

The Merrill lynch takeover would make Bank of America the top US bank, and was likely to put 40 percent, or about 24,000 of Merrill’s 60,000 non-broker employees, out of work, analysts suggested.

That, combined with Lehman’s approximately 26,000 workers, will send shockwaves through the job market.

Stocks slid following Monday’s opening bell on Wall Street as traders scrambled amid a crisis in the US financial system set off by the bankruptcy of Lehman Brothers Holdings.

The banking giant’s demise makes it the biggest casualty yet in the long-running credit crisis, which has so far put several major financial firms in the red, some re-structurings and acquisitions, and closure of a few commercial banks.

But until Sunday night, no Wall Street firm of Lehman’s size and stature had suffered an all-out meltdown.

Meanwhile, over the weekend, government officials and Wall Street executives discussed speeding up new protections against short-selling, the Wall Street Journal said citing a person familiar with the matter.

Securities and Exchange Commission (SEC) Chairman Christopher Cox assured Wall Street chiefs amid a series of frantic weekend meetings over the fate of Lehman Brother Holdings Inc. that the SEC would institute protections soon, it said.

Wall Street firms earlier this summer successfully lobbied the SEC to restrict certain types of short sales for 19 financial companies.

Regulators are rushing to assure Lehman Brothers brokerage customers that their accounts will be protected and transferred to other brokerage firms. Lehman’s investment management division had $282 billion in assets under management through the end of last year.

The SEC said it would prevent the parent company from taking capital out of the brokerage firm or co-mingling money from other parts of the business with customer accounts.

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