Shares in the red as Bush blusters
Sep 27 2008 by Iain Laing, The Journal
THE City’s leading shares sank into the red yesterday as investors took scant comfort from President Bush’s pledge to “rise to the occasion” with a banking rescue.
Uncertainty over prospects for a £381bn plan to take toxic bad debts away from banks weighed on the FTSE 100 Index throughout the day as traders awaited firm news of a deal.
The Footsie finally closed 2.1% lower at 5088.5 as the Bank of England joined central banks around the world in pumping billions extra into frozen money markets.
Stocks had risen sharply on Thursday on hopes of a deal but were hit yesterday amid disappointment after talks in Washington broke up without agreement last night.
President Bush said the negotiations were “hard work” but added: “There are disagreements over aspects of the rescue plan but there is no disagreement that something substantial must be done... We are going to rise to the occasion.”
Wall Street’s Dow Jones Industrial Average picked up following the president’s comments but remained in negative territory.
The collapse of Washington Mutual – the largest US bank to fail so far – underlined the current fragility of the financial system as the fall-out from the US housing slump spreads around the globe.
The latest victim of the credit crunch has been bought by JP Morgan, the same company which also bought failed investment bank Bear Stearns in March.
CMC Markets dealer Ian Griffiths said: “The big story continues to revolve around progress of the proposed bail-out for troubled financial institutions across the Atlantic and so long as a resolution here drags on, stocks seem set to find themselves continually under pressure.” The worsening financial crisis forced the Bank of England into an unprecedented intervention as it offered at least £40bn to cash-strapped banks.
Lenders are hiking mortgage costs because of a sudden surge in the rate at which banks lend to each other for three months, as those hit by the credit crunch hoard funds.
The Bank usually offers three-month money on a monthly basis, but will hold auctions every week from Monday for the first time while the pressures remain.
The central bank has not revealed the sums involved in future auctions but they are likely to be of a similar size to Monday’s if desperate banks snap up the funds.
The move comes as interbank three-month lending rates soared to 6.28% – way above the Bank’s official 5% base rate. The spread is now wider than at the time of Northern Rock’s emergency bail-out by the Bank of England just over a year ago.
