The world
financial system remained on a precipice over the weekend, awaiting the opening of markets Monday, after
central
banks in Europe, the United States, Japan and several other Asian countries were compelled to intervene Thursday and Friday with massive commitments of funds to stave off a global panic. A total of $323 billion was poured into the markets over two days, an injection equivalent to that carried out in the aftermath of the terrorist attacks of September 11, 2001. The bailout came too late to stem the fall in Asian and European markets, but the New York Stock Exchange rallied after a fall of nearly 200 points, with the Dow Jones average ending 31 points down. For the week, the US market was virtually unchanged after a series of colossal moves up and down, including Thursday’s plunge of 387 points. European and Asian markets ended Friday’s trading down between 2 and 4 percent before the second round of support from the European
Central Bank (ECB) and the US Federal Reserve. The FTSE index of London stocks dropped 3.7 percent, the French CAC index fell 3.1 percent, while Germany’s DAX declined 1.5 percent. Japan’s Economy Minster Hiroko Ota told reporters, “The effect of US subprime loans is spreading to
financial markets around the world.” The ECB and the Fed had to intervene Friday as it became clear that Thursday’s actions had failed to stem the rout. The ECB followed Thursday’s $130 billion in loans with an additional $84 billion, while the Fed injected $38 billion on top of Thursday’s $24 billion worth of support. Friday’s Fed intervention came in three stages—$19 billion in the morning, $16 billion more in the early afternoon, and $3 billion towards the end of the trading day, indicating that the central bank was gauging the effect of its actions hour by hour and reinforcing its support when the market began to give way again. While the sums expended by the central banks were far larger than their everyday operations, the amounts are small compared to the scale of world financial markets—an estimated $175 trillion in stocks, bonds and other debt instruments—and the trillions in paper value already wiped out in the convulsions of the past several weeks. The events of Thursday and Friday demonstrate that, despite the common desire to forestall a chain reaction collapse of the world financial system, the various central banks have differing and in some cases directly conflicting agendas based on disparate national policies and concerns. The European Central Bank, for example, pumped more than three times as much into the financial system as the US Federal Reserve, although European and American markets are approximately the same size and the immediate focus of the financial crisis is in the United States, with the collapse of the market for securities based on subprime mortgages. The major concern in Frankfurt was the shaky state of confidence in the continent’s banking system, with the state-organized bailout of the German IKB Deutsche Industriebank followed by the announcement by BNP Paribas, the biggest publicly held French bank, that it was suspending redemptions from three of its hedge funds caught up in the US mortgage market crisis. The IKB crisis was a direct product of the American mortgage-lending debacle, as the regional bank, specializing in lending to small and medium companies, had become deeply committed to the US property market. Der Spiegel magazine reported Friday that IKB and its affiliates had more than $10 billion in loans to the US mortgage sector, twice the previous estimate, including nearly $8 billion invested by Rhineland Funding Capital Corporation, which is managed by the bank. The German government and the national central bank, the Bundesbank, organized a bailout of IKB, with credits totaling nearly $10 billion routed through the state-owned KfW bank, which owns the majority of the shares in IKB. Prosecutors in the Ruhr capital of Düsseldorf have begun a criminal investigation into IKB’s operations, and the bank’s chief financial officer resigned August 7, eight days after CEO Stefan Ortseifen.