“This is worse than a divorce. I’ve lost half my net worth and I still have a
wife,” said one shell-shocked share trader at the end of the worst day on
the stock market for twenty years.
There was the usual grim and politically incorrect humour. There was the usual
blaming of everybody else, particularly the politicians. But the main
emotions were panic and fear. Panic at what was happening and fear that it
might get worse.
It wasn’t supposed to be this way. The Bank of England’s half-point interest
rate cut on Wednesday was supposed to show its determination to prevent an
economic slowdown turning into a slump. The £500 billion support package for
Britain’s banks was supposed to restore confidence in the financial system.
But, of course, the unprecedented moves also sent another signal. If the Bank
and the Government are prepared to take such desperate measures, they must
be really worried.
The biggest worry is not that the actions taken by the Government – which are
likely to be copied by other countries – will not work to stabilise the
financial system. The worry is that even if they do work they will not
prevent a deep worldwide recession.
It was that fear that lay behind yesterday’s panic in the markets. The crisis
has spread way beyond its origins in the US financial system. One of the
triggers for the latest stockmarket slump was concerns about General Motors,
whose shares tumbled 31 per cent to their lowest since 1950 on Thursday on
worries that it might go bankrupt. And investors fear that the US and
European slowdown is spreading to fast-growing Asian markets.
The panic in London started as soon as traders saw the slump in New York
trading on Thursday night. A sudden collapse in the last hour of trading
left American shares down about 7 per cent. Many London traders saw the news
on television screens in City bars where they were quenching the “Thursday
thirst”. They left early to get into the office first thing next morning.
When they arrived they surveyed the damage in Asia, where the Tokyo market
dropped almost 10 per cent, for a fall of 24 per cent on the week. Within
minutes of the London market opening at 8am, the FTSE 100 index was down 10
per cent, as more than £100 billion was wiped off the value of Britain’s top
100 companies.
Shares swung wildly during the day and the losses were pared back in the
afternoon, helped by a rally in early New York trading. But as US shares
slumped back London followed, driving the FTSE 100 back down to close 8.9
per cent lower at 3,932. Investors dumped shares and anything deemed
remotely risky, putting the money into gold and cash. “There are only two
positions you can have in this market: cash or foetal,” was the gag going
round the New York Stock Exchange.
Trading was relatively light, with the big pension funds and insurance
companies sitting on the sidelines. This gave the optimists some hope.
They argued that much of the fall was due to selling by hedge funds and other
investors that had debt secured against their shareholdings. When these fell
in value they were forced to sell by their banks, putting further pressure
on share prices.
Some of the selling was by investors who had been lent money by Icelandic
banks that were pulling in their loans after being nationalised this week.
But the pessimists said there could be further to go. The head of one of
Britain’s biggest banks said: “The market is trying to find the bottom and
it’s just not there.”
Howard Wheeldon, senior strategist at BGC Partners, said: “Irrational fear has
gripped and it seems that markets will now trash almost anything that walks.
For now it is unstoppable.”
The collapse was particularly alarming as it came after this week’s emergency
half-point interest rate cuts by Western central banks and the unveiling by
the Government of a £500 billion plan to support Britain’s top banks.
“We may well see another round of interest rate cuts next week,” Mr Wheeldon
said. “Whatever, it is increasingly clear that attempts by the US and UK
government to address the vast number of capital market issues just isn’t
enough.”
The bank support plan was widely acclaimed as stopping the rot in the
financial system by forcing the banks to raise more capital, with taxpayers’
money if need be, and by guaranteeing new bank borrowing. In particular, it
was hoped that the plan would boost confidence in the banks who have become
unwilling to lend to other banks because they fear they may not get the
money back. But the interest rate at which banks are prepared to lend to
each other has increased since the support plan was unveiled.
The head of one of Britain’s leading banks said confidence should start to
improve over the next few days. But some bankers say it is essential that
other countries follow the UK lead by forcing their banks to raise capital.
Other countries are examining the British plan, and the US Government is
looking at injecting taxpayers’ money into American banks, and guaranteeing
bank debt.
In London, banks were the biggest fallers with Royal Bank of Scotland down 25
per cent and HBOS down 19 per cent, as investors worried about how much the
value of existing shares will be diluted by the news of the capital that
must be raised.
Shares in big mining companies fell sharply on fears that lower growth in
India and China will reduce demand and hit metal prices. This also weakened
the oil price, which fell almost $8 to $78.86, compared with a high of $147
in July. But gold, seen as a safe haven in the current turmoil, rose.
There were wild swings in currencies, with the pound falling to $1.69, its
lowest level for five years against the dollar, and it was down 1.2 per cent
against the euro.
Shares in fund management companies fell sharply amid fears that retail
investors will pull money out of unit trusts. European stock markets were
down in line with London while trading in Moscow was suspended.
The meltdown was being dubbed the Crash of 2008 and older traders were
comparing it with Black Wednesday in 1987. The fall this week of 21 per cent
was not as bad as the 28.3 per cent fall 21 years ago. But some traders were
saying it was worse. “At least then it was a short, sharp, shock on one day.
This has been relentless all week.”
All eyes are now on the meeting in Washington of finance ministers and central
bank chiefs from the West’s leading economies.
The US stock market recovered towards the end of trading and the Dow Jones
average closed down only 1.5 per cent. If governments can provide some
reassurance in Washington the optimists say that shares could rebound on
Monday, when New York trading is closed.
The doomsters say that the FTSE 100 has another 1,000 points to go before it
hits bottom.
Traders are expected to be in early again on Monday.
Heres a though, Lehman debt was reduced to one twelfth it's face value. This appears to roughly correlate to the real capital propping underlying the fiat expansions allowed under Bretton Woods. Now, call me a doomster but other assets could be decimated in an out of control debt deflation. Scary!
John P-T, Reigate,
Gee, my wife sized me up -- and even though I've lost half my net worth, she's sticking with me. That trader and I both have 4 ounces of water in our 8 ounce glass. Mine's nearly full; his is nearly empty. Go figure.
Mark, Atlanta, USA
As an obama presidency looms smart people with money in the market are pilling out in wait and see mode. its affecting the world market.
brett, wickett,
We have nothing to fear but fear. The trouble is that fear is just what we do fear and with some justification.
Recapitalising the banks and buying toxic financial instuments is merely treating the symptoms. The underlying causes require attention. Heads must roll before confidence returns.
Stephen Green, Correns, France
If the stockmarkets closed world wide for 48 hrs it would give time for heads to cool and common sense return.
Aileen, Melbourne, Aiustralia