MARKET CRASH SHAKES WORLD
By John Authers in New York, Chris Giles and Krishna Guha in Washington and Neil Hume in London
Financial Times
October 10, 2008
Original LinkUS stock prices suffered their worst weekly loss in history on Friday, prompting a pledge from global policymakers to implement an aggressive but broad-brush plan to combat the financial crisis.
Finance ministers and central bankers meeting in Washington said they would use “all available tools” to prevent the failure of any systemically important banks after a day of virtually indiscriminate selling in Asia and Europe and unprecedented volatility in the US.
The Dow Jones Industrial Average fell as low as 7,882.51 and rose as high as 8,901.28 before closing down 1.5 per cent at 8,451.19. For the week, its 18.2 per cent fall was the worst ever.
Policymakers from the Group of Seven nations said they would take “urgent and exceptional action” to stem the financial crisis, though stopped short of adopting a specific and uniform set of policies that would individually bind all its member countries.
The communiqué also did not include a wholesale adoption of a common policy such as the UK plan to guarantee interbank lending. “Different countries have different financial systems,” Hank Paulson, US Treasury secretary, said after the meeting.
The G7 said its tools to prevent failure of “systemically important financial institutions” would be tailored for each country, including recapitalising banks, ensuring strong deposit insurance to protect savers and restarting frozen credit and mortgage markets.
Mr Paulson firmed up the US intention to invest directly in troubled financial institutions, announcing a “standardised programme” of purchases of non-voting stock that would be designed to encourage private capital also to come forward.
The G7 communiqué followed a stomach-churning day on Wall Street that saw measures of volatility reach unprecedented levels.
The main volatility gauge, the Chicago Board Options Exch-ange’s Vix index, rose above 75, having never even breached 50 before this week. At its low point yesterday, the Dow was down as much as 23.64 per cent for the week.
During the week of the Great Crash of 1929, the Dow lost 23.62 per cent at its worst point before ending the week down 9.2 per cent. Losses in other major markets were more severe than in the US. The UK’s FTSE 100 lost 21 per cent, the FTSE Eurofirst 300 22 per cent and Japan’s Nikkei 225 24.3 per cent.
“The events we’ve seen this week represent a once-in-a-generation increase in risk aversion and total lack of faith in the financial system surviving in its current state,” said Graham Secker, equity strategist at Morgan Stanley in London.
Confidence was shaken when investors bid 8.625 cents on the dollar for credit derivatives linked to the debt of the Lehman Brothers, which sought bankruptcy protection last month.
Trading was halted in several stock markets, including Russia.