Central banks are pumping vast amounts of cash into the world’s financial markets in an effort to contain the fall out from the crisis sweeping Wall Street’s biggest firms. The collapse of the 150-year-old Lehman Brothers, the fourth largest US investment bank, and the failure of the US Federal Reserve to bail it out has taken Wall Street by surprise.
Rudy de Groot, a leading equity analyst, said: “Until we had the rescue operation of Bear Stearns being taken over by JP Morgan it was also a Federal orchestrated bail-out package but now, from this time with the “no” from the US authorities, no-one is too big to fail any more. And that is quite a surprising fact.”
Clearly financiers were expecting the US Federal Reserve to step in and save Lehman Brothers as it did when Bear Stearns went under in March providing a 29 billion dollar cash injection for JP Morgan which paid two dollars, or 1.4 euros, a share for the Manhattan bank.
Stocks, once worth 150 dollars each plummeting to just two dollars sent shockwaves through the New York Stock Exchange. Keith Cunnigham, a stock exchange employee said: “I think a lot of people, a lot of companies have been trying to hide their numbers and I think it’s going to come to light that a lot of the mortage sub-prime market has affected a lot of people.”
Then came Fannie Mae and Freddie Mac, two of America’s biggest and most reputable mortgage lenders responsible for roughly half of all US mortgage lending.
The US Federal Reserve stepped in with a 140 billion euro rescue package ($200,000,000) to prop up these two pillars of the market which, said Neil Weinberg, senior editor of Forbes magazine, gave financiers a false sense of security:
“Even worse than a government organisation or a private organisation that is acting widly, is a combination where you have the risks that are taken for private incentives for a profit making incentive,” he said.
“On the other hand you have this implicit guarantee which Freddie and Fannie had, that the government will ultimately back them up.”
With just seven weeks left before the American presidential election both candidates, John McCain and Barack Obama, have a lot to do to convince voters they can provide solutions amid ongoing uncertainty about the fate of American financial institutions.