Banking on a Global Recession

Some mixed messages from central banks this morning, with Australia "slashing" interest rates from 7 percent to 6 percent (causing its stock market to jump) while Japan maintained its interest rate at 0.5 percent (prompting the Nikkei to slump a further 2 percent), reports the BBC. European markets, frankly, are all over the place. This latest barometer comes just a few hours after U.S. investors weighed up the $700 billion bailout package, and European leaders' dithering over their own banking sector implosion, and voted with their feet. The Dow Jones Industrial Average plunged below 10,000 for the first time since 2004 yesterday, and European stocks had their worst day in 20 years, the Wall Street Journal reports, in what the paper calls "a stark sign that the crisis may be outpacing policy makers' ability to contain it."

Indeed, notes the New York Times, while the "sheer size [of the bailout] was meant to soothe the global financial system, restoring trust and confidence ... [now] it looks like a pebble tossed into a churning sea." Media organizations across the globe were struggling to put some context to this global financial freefall. The NYT told the story by the numbers, noting that over and above the Dow carnage, "the Russian stock market dropped 19.1 percent, the biggest decline since the fall of the Soviet Union. Major indexes in London and Frankfurt lost more than 7 percent; stocks in Paris fell by 9 percent. Stocks in Latin America and other emerging economies took their worst collective tumble in a decade." Let's not leave out Iceland. The former high-flying upstart economy saw its currency drop 30 against the Euro and its government "drew up sweeping powers allowing it to nationalise banks and sack executives," in a desperate rush to avoid "national bankruptcy," reports the Financial Times.

What appeared to be a crisis of confidence in liquidity has grown into a crisis about a shortage of capital, writes the Guardian, and coming on the back of a CNN poll showing that six out of 10 Americans anticipate a depression, the politicians and financial writers are grappling with what can be done to avoid economic catastrophe. The Federal Reserve is contemplating what the NYT calls "a radical plan ... to buy vast amounts of the unsecured short-term debt that companies rely on to finance their day-to-day activities." In the United Kingdom (now fully entrenched in recession), meanwhile, Treasury Chief Alistair Darling is considering a "£40-50 billion taxpayer-funded life-belt for high street banks," writes the London Times. Yet as enormous as these initiatives may seem, they are simply a micro band aid when what is needed is macro triage, writes the Guardian. It calls for global coordination led by the IMF and a G-7 expanded to include the leading developing economies. Unfortunately, writes the NYT, institutions like the IMF and World Bank "no longer have the resources or authority to lead such an effort."

Bank of America, we've been told, is one of the safe houses on the tottering U.S. financial street. It's sobering then to read the WSJ tell us that it slashed its quarterly dividend and "announced plans to raise $10 billion in new capital as it conceded that 'recessionary conditions' are sending tremors though the bank." The crumbling banking sector so far hasn't stopped Wells Fargo and Citigroup fighting each other for control of Wachovia, but yesterday the two banks agreed to a two-day truce as they try and forge a compromise.

Fed officials feared "a protracted legal battle could threaten the financial system," writes the NYT. Frankly, it seems the financial system can fail just fine without Citi's and Wells Fargo's help. Speaking of tanking sectors, the price of crude oil dropped below $90 a barrel yesterday, CNN Money reports. The fall is pushing down once-soaring oil company stocks, but giants like ExxonMobil and BP are so cash-rich that they can afford to ignore the stock market ... for the moment, says the WSJ. That's not a luxury the auto industry can afford, writes Business Week. It writes that "GM is looking at product delays to save cash, hoping the company can weather the weak economy and liquidity crisis and make it through to 2010." Ford has a good 18 months cashflow, the magazine writes.

Lehman Bros. CEO Richard Fuld is not known as a shrinking violet, and he lived up to that reputation in an appearance on Capitol Hill yesterday. Given a grilling by the House Oversight and Government Reform Committee that "painted a picture of a financial firm that operated like a casino run by greedy executives," Fuld both defended the $300 million he had received in pay and bonuses since 2000 and the $23 million he paid to three executives leaving Lehman just days before it collapsed. Fuld insisted that Lehman had been brought down not by internal executive incompetence by "by outside forces including lax oversight and 'short seller" traders."

Finally today, buried amid the financial wreckage coverage lies the news that Eli Lilly will snap up big-pharma darling ImClone for $6.5 billion. Just a drop in that churning sea, really.