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New York - US stocks have turned lower after the Federal Reserve disappointed by keeping interest rates unchanged.
Although many on Wall Street expected the Fed to keep its target federal funds rate steady at 2%, there was some hope that the central bank would try to calm uneasy financial markets with a quarter-point rate cut. So major indexes that were narrowly mixed just before the decision turned lower.
In a statement accompanying its decision, the Fed noted the growing strains in the financial markets and continuing weakening in the labor market. But it also sought to give some reassurance by saying it expected its policy moves to foster moderate economic growth over time.
The Dow Jones industrials, up modestly before the Fed move, fell 106 points to the 10 811 level.
Stocks swung on Tuesday as investors worried whether the world's largest insurer would survive, a day after a stunning upheaval in the American financial system sent shock waves through the global market, producing the worst day on Wall Street in seven years.
The Dow Jones industrial average on Monday lost more than 500 points as investors grappled with the failure of Lehman Brothers, one of Wall Street's most venerable banks, and wondered who would be the next to fall. It was the steepest drop since the day the stock market reopened after the September 11 2001 attacks.
Cripled
The uncertainty follows a tumultuous 24 hours that redrew US finance. Lehman Brothers, which predates the US Civil War and weathered the 1930s Great Depression, filed the largest bankruptcy in American history. A second storied bank, Merrill Lynch, fled into the arms of Bank of America.
Monday was by far the most stomach-churning single day since a financial crisis began to bubble up from billions of dollars in rotten mortgage loans that have crippled the balance sheets of one bank after another and landed mortgage giants Fannie Mae and Freddie Mac under the control of the federal government. About $700bn evaporated from retirement plans, government pension funds and other investment portfolios.
Internationally on Tuesday, France's benchmark CAC-40 index and Germany's DAX 30 index of blue chips were both down 2%, and the FTSE-100 share index was 3.71% lower in London. Earlier, Asian stock markets plummeted, catching up with other markets around the world after a holiday Monday kept Tokyo and Hong Kong bourses closed.
In Johannesburg, the JSE's all share index closed 2.59% lower at 24 978.860, a level last seen in December last year. Resources fell 4.22%, with the gold and platinum mining indices giving up 2.97% and 3.10% respectively.
Unapologetic
The fallout was far from over as AIG continued its fight to stay alive. New York governor David Paterson moved Monday to allow the company to tap one of its subsidiaries for an emergency loan to stay above water. Almost $20bn in AIG's shareholder value was wiped out Monday.
Treasury Secretary Henry Paulson, who refused to toss a financial lifeline to Lehman, was unapologetic on Monday as the Bush administration signaled strongly that Wall Street should not expect more rescues from Washington.
The result was the sixth-largest point drop ever on the Dow and one of the most momentous days in Wall Street history since legendary banker J. Pierpont Morgan helped broker the rescue of financial markets during the Panic of 1907.
While Lehman Brothers was filing for bankruptcy and AIG was scurrying to find financing, Merrill Lynch was avoiding a similar fate with a $50bn transaction to become part of Bank of America Corp.
The deal would create a financial giant rivaling Citigroup, the biggest US bank in terms of assets. Bank of America has the most deposits of any US bank, while Merrill Lynch is the world's largest and most widely recognized brokerage.
There were also worries that Lehman's problems would infect other financial companies and spread to global stock markets, further harming the US and global economies.
The financial turbulence could also further derail consumer confidence in the economy just as stores prepare for the critical holiday shopping season. The upheaval in the financial system also means that those consumers with marginal credit history will have an even harder time getting loans, cutting into consumer spending.
- AP