Scramble to calm markets

By Francesco Guerrera and Michael Mackenzie in New York and Krishna Guha in London

Central bankers and regulators on Monday scrambled to shore up confidence in financial markets as panicky investors reacted to the news that Bear Stearns’ equity was close to worthless and fears that the investment bank may not be the last casualty of the credit crunch.

On Wall Street markets fluctuated wildly all day – veering between negative and positive territory as investors were buffeted by rumours which sank shares at a number of financial groups – including UBS and Lehman Brothers, which reports on Tuesday, and which at one point saw its stock fall 46 per cent.

The US Federal Reserve’s move on Sunday to offer emergency finance to all its primary dealers initially appeared to spook the markets further.

The US central bank faces intense pressure to cut interest rates by at least 75 basis points and possibly 100 points or more at its policy meeting on Tuesday.

President George W. Bush meanwhile opened the door to further emergency actions by US authorities. “We obviously will continue to monitor the situation and when need be, will act decisively, in a way that continues to bring order to the financial markets,” he said.

Hank Paulson, the Treasury secretary, continued to hold talks with banks on Monday.

It emerged that the US government has agreed to take on any credit losses suffered by the Fed on its $30bn loan to Bear Stearns. A senior Treasury official said the move could cost taxpayers’ money, although it could also make a profit.

The Fed will employ a private sector group – as yet unnamed – to help it manage the collateral backing that loan.

In Asia and Europe shares tumbled, led by financial stocks, and the dollar plumbed fresh lows against the euro amid growing concerns that other financial institutions could suffer the same fate as Bear.

Lehman Brothers’ shares plummeted more than 37 per cent in afternoon trading, prompting its chief executive Richard Fuld to put out a statement reassuring investors its liquidity position was sound.

Mr Fuld said the Fed move to allow investment banks to access funds usually reserved just for commercial banks “takes the liquidity issue for the entire industry off the table”.

Analysts said that Sunday’s Fed-sanctioned takeover of Bear Stearns by JPMorgan Chase for just $230m – one hundredth of Bear’s valuation a year ago – had caused investors to flee shares of investment banks and other financial institutions.

Shares in Bear Stearns were down nearly 90 per cent at $3.70, while JPMorgan had risen 8.8 per cent on news of the deal.

UBS, the Swiss bank, was under intense selling pressure. MF Global, a futures broker, was forced to deny rumours that Joseph Lewis, the UK-born billionaire who lost more than $800m on his Bear Stearns investment, was a client.

The rumours had caused a wave of selling in MF’s shares, which were down as much as 70 per cent in morning trading. Investors switched away from assets perceived as risky, pushing down the price of oil from recent highs, and moved aggressively into safe havens, sending the yield on the three-month Treasury bill to a 50-year low.

The S&P 500 was down 2.2 per cent at 1,265.11 and near its day’s low in early afternoon trade. The S&P investment bank index was 14.5 per cent lower and has lost more than 50 per cent since its high last June.

In London, the FTSE 100 fell 3.86 per cent to 5414.4 and the FTSE Eurofirst was down 4.1 per cent.

The Hang Seng lost 5.18 per cent and the Nikkei closed 3.71 per cent down.

The dollar sank to fresh record lows against the euro and the swiss franc, while it was 2.2 per cent lower versus the yen at Y96.91.

In early trade the dollar fell to Y95.78, its lowest level since September 1995.