Global stock markets under pressure on Bear Stearns’ bailout

Global stocks tumbled again on Friday, giving up early gains as news that US investment bank giant Bear Stearns needed to be bailed out dashed hopes that the worst of the credit crisis might be over.
Bear Stearns, among the hardest hit by the collapse of the US subprime home loan market, said it was getting an emergency loan from JPMorgan Chase in coordination with the US Federal Reserve after its liquidity position had “significantly deteriorated.”
At the same time, a Fed commitment “to provide liquidity as necessary to promote the orderly functioning of the financial system” highlighted concerns about the credit squeeze and its wider impact on the banks.
“We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations,” the bank’s president and chief executive Alan Schwartz said of the emergency funds.
The news immediately knocked the markets which had been showing modest gains after another turbulent week, helped by a Standard and Poor’s report which had suggested the worst of the subprime fallout could be over.
That idea died on the spot Friday after the Bear Stearns’ announcement, with the euro and gold immediately charting new record highs as investors sought safety from the growing storm on the financial markets.
“With risk aversion back on the agenda, amid fears of hedge fund collapses and more troubles for the banks exposed to mortgage-backed securities, it is almost as if the recent decision by the Fed and other central banks to boost liquidity never happened,” said Calyon analyst Stuart Bennett on Friday.
In London, the London FTSE 100 index was down 1.07 percent to 5,631.70 points, in Paris the CAC 40 lost 0.82 percent to 4,592.15 points and in Frankfurt the Dax shed 0.75 percent at 6,451.90 points.
The Euro Stoxx 50 index of leading European shares was down 0.92 percent at 3,566.59 points.
The euro was at 1.5620 dollars, off its record high earlier of 1.5688.
On Wall Street, the Dow Jones Industrial Average was down 1.94 percent at around 1745 GMT.
Bear Stearns’ shares fell dramatically, with investors rattled only a day after an affiliate of US private equity giant, the Carlyle Group, defaulted on nearly 17 billion dollars of debt.
One of Carlyle’s three co-founders, David Rubenstein, told the Washington Post newspaper that the current financial market turmoil “is deeper than anything we have seen since the Depression.”
The Fed’s announcement on liquidity came amid growing concerns about the outlook for a financial system left holding mortgage-backed securities in a market that has frozen because of the meltdown in US real estate.
The US central bank last week announced a new program that would allow firms to swap their mortgage securities for US Treasury bonds to help unblock the market but that program will not start until March 27.
Treasury Secretary Henry Paulson, without specifically addressing the Bear Stearns news, insisted the US financial system “is flexible and resilient.”
“This is another challenge that market participants and regulators are addressing. We are working closely with the Federal Reserve and the SEC (Securities and Exchange Commission),” Paulson said in a statement.
In London, shares gave up early gains on the latest US developments.
“It is all linked to Bear Stearns. The market was panicked again … if that can happen to Bear Stearns (then people think), why can’t it happen to other banks,” one dealer said.
The banks were rocked badly as a result, with HBOS down 6.05 percent to 528 pence, Barclays fell 3.94 percent to 433 pence and HSBC shed 1.93 percent to 762.50 pence.
In Paris, where the market was up 1.68 percent at one stage before the Bear Stearns’ news, dealers said investors were shocked since the head of the bank had only a few days previously insisted that all was well.
“The crisis of confidence is enormous, with one day’s revelations worse than the other,” one dealer said, adding that trades were now very short term, with investors unwilling to hold positions for long.
Among the banks, BNP Paribas lost 2.49 percent to 59.20 euros and Natixis was off 4.27 percent to 8.75 euros
In Frankfurt, it was a similar story, with Commerzbank down 2.38 percent to 18.04 euros as Deutsche Bank fell 1.77 percent to 69.99 euros.
Elsewhere in Europe, Belgium’s Bel-20 was down 0.79 percent to 3,676.88 points, Madrid’s Ibex- was off 0.40 percent at 13,021.40 points, Italy’s MIB 30 fell 0.93 percent to 32,211 points, the AEX in Amsterdam shed 0.52 percent to 432.30 points and Switzerland’s SMI shed 1.65 percent to 7,132.03 points.
In Asia, Japanese shares closed down 1.54 percent at the lowest level for two years and seven months on worries about a stronger yen and the weakness of the US economy while Hong Kong slipped 0.29 percent.

Copyright AFP (Agence France-Presse), 2008