Date:18/09/2008 URL: http://www.thehindu.com/2008/09/18/stories/2008091856631700.htm

Business

U.S. stocks tumble as insurer teeters

- PHOTO: AP

WORRIED LOT: Investors gather at the post that trades Constellation Energy on the floor of the New York Stock Exchange on Tuesday. Wall Street fluctuated in a wide range after the Federal Reserve disappointed some investors by keeping interest rates unchanged, but also sent a signal to the markets that the economy is not in dire straits.

NEW YORK: Stocks tumbled again on Wednesday as investors remained worried about chaos in the U.S. financial market even after the Federal Reserve forged an extraordinary $85-billion rescue of insurance giant American International Group Inc.

The Federal Reserve’s emergency loan to shore up AIG, the huge U.S. insurer reeling from billions of dollars in souring mortgage debt, temporarily lifted some of the uncertainty about the stability of the U.S. financial system, but the market fell again as investors kept a wary eye on the stumbling economy.

The two Wall Street investment banks left standing — Goldman Sachs Group Inc. and Morgan Stanley — remain under scrutiny. And the troubles in banking could exacerbate economic problems. The Commerce Department said on Wednesday that housing starts fell by 6.2 per cent in August to the slowest building pace since January 1991. In early trading, the Dow Jones industrial average was down 203 points at the 10,855 level.

The Fed said on Tuesday night that it was acting to shore up AIG after determining that a disorderly failure of the company, whose financial dealings stretch around the world, could hurt the already delicate markets and the economy. Asian stock markets partly recovered on Wednesday after the U.S. government announced the bailout plan for AIG, but later dipped as the news failed to persuade many investors that the financial turmoil would ease soon. European stocks rose after two days of declines.

Fed rates unchanged

The Fed stepped in hours after it decided, in its first unanimous vote this year, to keep the closely watched federal funds rate unchanged at 2 per cent. At the same time, however, the Fed noted that strains on the market have “increased significantly”.

Meanwhile, Barclays Plc. said on Tuesday it had agreed to acquire Lehman’s North American investment banking and capital markets businesses for $250 million in cash, just two days after walking away from a deal to purchase all of Lehman’s.