Stearns Lifeline Spooks Wall St

The Sunday Age

Sunday March 16, 2008

John Mangan

THE Standard & Poor's 500 Index fell for a third week after a cash crisis at Bear Stearns, the fifth-largest US securities firm, overshadowed the US stockmarket's biggest one-day rally in five years.

As the Wall Street investment bank received emergency funding on Friday, spurring concerns that other banks lack funds, investors sought a haven in gold, pushing spot gold prices to an all-time high, peaking above $US1000 ($A1066) a troy ounce.

The S&P500 Index dropped 2.1% while the Dow Jones Industrial Average lost 194.65, or 1.6%.

Australian stocks, especially banks, are expected to reflect the turmoil on Wall Street, with the Share Price Index Contract suggesting the Australian stockmarket will fall 35 to 40 points when markets open.

US President George Bush, meanwhile, made his most striking acknowledgment yet of his country's economic woes, at the same time warning against more drastic Government intervention.

He told the Economic Club of New York the economy was now having "a tough time". "If you ever get stuck in a situation like that, you know it's important not to over-correct," he said. "If you over-correct, you end up in a ditch."

Mr Bush spoke only moments after the Federal Reserve intervened to help Bear Stearns stave off collapse, securing financing through JPMorgan Chase for up to 28 days.

A day earlier Mr Bush's Treasury Secretary, Henry Paulson, announced limited regulatory steps to tighten rules for credit agencies, mortgage brokers and banks.

Democrat Senator Chuck Schumer slammed Mr Bush for his reluctance to intervene more aggressively in the credit crunch. "When the President said that everything is fine, when the President says he will not do simple things like deal with the foreclosure crisis, he's not going to make the economy much better.

"The bottom line: it seems as if the President is on a different economic planet than most Americans."

The Fed acted to prevent the failure of Bear Stearns, the second-biggest underwriter of US mortgage bonds, and to stem potential market panic as losses by banks and brokers reached $US195 billion.

The announcement of the intervention caused financial shares to plunge, with Bear Stearns tumbling a record 47% in New York Stock Exchange trading. The stock has lost 66% of its value this year.

Asian stocks fell to a two-month low last week, led by exporters such as Sony Corp, on concern widening credit losses in the US and record oil prices will slow global growth. Steelmakers and transportation stocks such as airlines fell after oil prices climbed to a record $US111 a barrel.

© 2008 The Sunday Age

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