Wall Street teeters, the Empire and China shake

September 18, 2008

Markets in New York were rocked again on Wednesday as anxieties about the financial system ran high after the government's bailout of insurer American International Group left investors with little confidence in many banking stocks. The Dow Jones industrial average nosedived about 450 points, down more than 800 points or 7 percent so far this week. The market was more unnerved than comforted by news that the Federal Reserve is giving a two-year, 85 billion dollar loan to AIG in exchange for a nearly 79.9 percent stake in the company, which lost billions in the risky business of insuring against bond defaults. With the markets rattled, waiting to see who the next victim could be, shares of two other major financial firms Morgan Stanley and Goldman Sachs, sank 24 percent and 14 percent respectively.

Markets in New York were rocked again on Wednesday as anxieties about the financial system ran high after the government's bailout of insurer American International Group left investors with little confidence in many banking stocks. The Dow Jones industrial average nosedived about 450 points, down more than 800 points or 7 percent so far this week. The market was more unnerved than comforted by news that the Federal Reserve is giving a two-year, 85 billion dollar loan to AIG in exchange for a nearly 79.9 percent stake in the company, which lost billions in the risky business of insuring against bond defaults. With the markets rattled, waiting to see who the next victim could be, shares of two other major financial firms Morgan Stanley and Goldman Sachs, sank 24 percent and 14 percent respectively.



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Story Transcript

AIG bailout rocks markets

Producer: Carlo Basilone

CARLO BASILONE (VOICEOVER): Markets in New York were rocked again on Wednesday as anxieties about the financial system ran high after the government’s bailout of insurer American International Group left investors with little confidence in many banking stocks. The Dow Jones Industrial Average nosedived about 450 points, down more than 800 points or 7 percent so far this week. Jittery investors switched to hard assets like gold, which had a record one-day rise—more than 10 percent, or $89, to $866.10 an ounce. The market was more unnerved than comforted by news that the Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a 79.9 percent stake in the company, which lost billions in the risky business of insuring against bond defaults.

HEIDI MOORE, WRITER, WALL STREET JOURNAL: Their balance sheet, which means their assets, are about $1.04 trillion. They do business with almost every other financial institution in the United States, and they help insure the debt on those financial institutions. If AIG went down, it would just create repercussions through every other bank. And the banks are having trouble already, so who needs more of that?

BASILONE: Though the $85 billion loan is expected to be paid back within 24 months, there are no guarantees.

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DANA PERINO, WHITE HOUSE PRESS SECRETARY: The taxpayers will be paid back first.

REPORTER: When you say taxpayers will be paid back first, they may not be paid back at all.

PERINO: Well, that is true, and that’s why we take great care in making sure that the president’s asked a lot of questions to make sure that his economic advisors have thought things through.

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BASILONE: With the markets rattled waiting to see what the next victim could be, shares of two other major financial firms, Morgan Stanley and Goldman Sachs, sank 24 percent and 14 percent respectively. A column entitled "Socialism, 21st Century Style" by The New York Times chief financial correspondent Floyd Norris says, "The government – nationalized the American International Group…. That is not the official version. Fed staffers – don’t even want us to say the government will control AIG…. It will have a warrant allowing it to take 79.9 percent of the stock whenever it wants. But they contend there is no control until the warrant is exercised. The Federal Reserve and the Bush administration believe that the threat of defaults by AIG on a lot of unregulated derivative contracts creates a national emergency. It’s too bad they didn’t think that when they were opposing any efforts to regulate those markets. That would have been interfering with free enterprise. This move, somehow, is not. Can you imagine what conservatives would say if a liberal Democrat had moved to nationalize major financial companies?" The US markets’ nosedive was being felt around the world, with markets in Asia and Europe reacting with alarm to the upheaval on Wall Street.

DOUG HENWOOD, EDITOR, LEFT BUSINESS OBSERVER: There was a quaint little idea that emerged right after the financial crisis broke out last summer which was called "decoupling." That is, the United States could go into crisis and recession, and the rest of the world would just go chugging happily onward. I think we have given up on that idea. It looks like Western Europe is now in recession; Japan looks to be in recession. Certainly it’s not good news for Canada to see the US going into recession. But the big question mark right now is China. China keeps growing, but how long can they continue to do that? Do they have enough other export markets? Do they have a sufficient internal demand to keep themselves going? Or is this going to drag them down with them? So if the growth rate slows down in China, then it could expose a lot of bad loans and cause financial problems there. China’s been doing a lot of business with everyone, but of course the export to the US market has been very central to Chinese economic growth. We also owe the Chinese a lot of money. One of the reasons that the Bush administration didn’t waste any time nationalizing Freddie and Fannie was that China owns hundreds of billions, perhaps a trillion dollars worth of their bonds, and they are deeply tied to our fate. If the United States bond market goes sour, or if we have an inflationary spike here, if there’s any threat of default by the US treasury, China is really on the hook for a lot of money, and so are a lot of other countries—Russia, South Korea, India, Japan. But China is the champion buyer of US paper.

BASILONE: Do you think that this could have geopolitical problems?

HENWOOD: Whether this is, you know, curtains for the American Empire, I don’t know, but it does seem like the United States is experiencing some really severe challenges in the economic, political, military, and cultural spheres. Despite the claims of the Bush administration, the Iraq War has not gone well. The Afghanistan War has not gone well. US prestige is at very low levels. The whole neoliberal economic model is in disrepute. The United States is just disliked by a number of countries around the world in ways that we haven’t seen since the Vietnam War. And our economic problems are visible for the world to see. So there’s the potential of a great deal of instability when you see this kind of weakening of the hegemonic power, and there’s no one really clearly in the wings at this point. China’s not ready to take over. Russia’s certainly not ready to take over. So there could be a period of considerable political instability if the decline of American power leaves some kind of vacuum. So this is quite an interesting adventure we’re undergoing.

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