x Abu Dhabi, UAEWednesday 24 January 2018

Speculators attack Wall Street's last two big investment banks

America's last two independent investment banks, Morgan Stanley and Goldman Sachs, come under pressure.

Wall Street stumbled again tonight, with anxieties about the financial system still running high even after the bailout of AIG.
Wall Street stumbled again tonight, with anxieties about the financial system still running high even after the bailout of AIG.

America's last two independent investment banks, Morgan Stanley and Goldman Sachs, came under sustained selling pressure in trading yesterday on Wall Street. Morgan Stanley shares fell by 44 per cent at one point, its lowest level for 10 years, while Goldman Sachs followed it down, dropping by 23 per cent. Markets were reacting to "rumour and fear", said Colm Kelleher, the finance chief of Morgan Stanley, while reporting better than estimated earnings for the third quarter.

In response to fears of market manipulation, the Securities and Exchange Commission will implement rules today making it more difficult and expensive for short sellers to operate and drive the market further downwards. The moves may have come a day too late. There is no doubt that investors have taken a good look at the American International Group (AIG) bailout and do not like what they are seeing.

The chances of the banks remaining independent now look very slim, particularly as credit default swaps for both have risen to an all-time high, indicating that traders expect them to collapse. Gulf markets, despite rallying yesterday, are likely to come under renewed attack, particularly in the financial sector. Large falls in the GCC today cannot be ruled out now. GCC markets yesterday were buoyed by the US government's rescue of the insurance giant AIG, but the gains were not impressive - all Dubai could do was regain Tuesday's losses and close at Monday's level. The Dubai Financial Market (DFM) closed up 2.29 per cent, reclaiming the losses made on Tuesday, while the Abu Dhabi Securities Exchange posted a 1.62 per cent gain.

Other GCC markets posted as good as, if not bigger, gains - Saudi was up 2.36 per cent, Doha gained a huge 8.61 per cent after seeing some significant losses earlier this week, while Muscat was boosted by a 4.16 per cent rise. Smaller but equally important gains given the freefalls of recent days and weeks were seen in Kuwait and Bahrain, which continue to lag the rest of the region, rising 1.87 and 1.13 per cent respectively.

GCC markets were buoyed by a rally on Tokyo's Nikkei, which closed up 1.2 per cent, while managing to shrug off disappointing news in Hong Kong, which fell 3.63 per cent, a surprising drop considering its losses on previous days. With that exception, Asian markets generally reacted favourably to the US government's announcement that it would provide an US$85 billion (Dh312bn) loan to AIG and take ownership of 80 per cent of the company's shares. They have yet to absorb the shock of Morgan Stanley and Goldman Sachs.

Analysts had feared AIG's collapse would exacerbate the global financial chaos because the giant underwriter was so closely entwined with many of the world's financial institutions. Investor confidence is already fragile, with a Merrill Lynch survey - conducted before the Lehman Brothers collapse - finding that 61 per cent of fund managers believe a recession is likely in the next 12 months. In addition, the bank's Risk and Liquidity composite has fallen to its lowest level in more than a decade, showing that investors have adopted more defensive strategies and shortened their investment time horizons, with liquidity conditions seriously worsened since last month.

In a hectic day on the London Stock Exchange, shares rose at first, despite the plummeting value of the banking group HBoS, and were given a fillip when it emerged that rival Lloyds TSB was close to acquiring the beleaguered bank. The LSE's FTSE 100 Index closed at 4912.4, down 2.8 per cent - the first time it has closed below 5,000 since June 2005. Lloyds stock was up 15 per cent on the back of the news and HBoS recovered its heavy early morning losses to be up nine per cent. However, as soon as New York opened nearly two per cent down, and because of traders' fears that the AIG bailout would not be enough to help the system, London followed suit, falling more than one per cent along with similar losses in Frankfurt and Paris. At a stroke, European markets had their mini-recovery wiped out. Moscow's two stock exchanges suspended trading yesterday for the second day after huge falls in the markets - they have collapsed by more than 50 per cent since peaking in May, and continue to do so. This follows the impact of the Georgian war, which scared off foreign investors, the oligarchs' battle with the oil major BP and falling oil prices. afoxwell@thenational.ae