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Carroll School of Management

Duncan L. Niederauer

chief executive officer, nyse euronext

Duncan L. Niederauer, Chief Executive Officer of NYSE Euronext, addresses the Boston College Chief Executives' Club in the Wharf Room at the Boston Harbor Hotel on October 7, 2008.

Stocks fall again; Fed intervenes on lending

US stocks plunged again yesterday as central bankers around the world rushed to bolster deteriorating financial institutions and restore lending to companies that are cutting back because they are frozen out of credit markets.

In the United States, the Federal Reserve Bank took the extraordinary step of saying it would directly buy the short-term debts of businesses locked out of frozen credit markets.  Its chairman, Ben S. Bernanke, also signaled the central bank may soon cut interest rates because teh "sever financial instability" the country is now experiencing "can take a heavy tol on the broader economy, if left unchecked."

The Dow Jones industrial average lost 508.39 points yesterday, mostly in late trading as news surfaced that the British government is preparing to spend as much as 50 billion pounds to rescue that nation's leading banks.  The Dow closed down more than 5 percent, at 9,447.11, and is now at its lowest level in five years.

One year ago tomorrow, the Dow closed at a record high of 14,164.53.  It has since lost one third of its value.

The financial situation around the world appears to be worsening despite a series of extreme, if disjointed, measures by governments to contain the problems, including the passage last week by the US Congress of a $700 billion bailout of banks and other firms burdened by toxic mortgage-related loans.

"Once you get behind the curve, it's a very nasty situation to bring back under control," said Brian Bethune, chief US financial economist for Waltham-based Global Insight.  "It's like a nuclear reactor that starts to melt down and you go into higher levels of emergency response to try to control it."

Other signs of global financial turmoil surfaced in the tiny northern country of Iceland, which yesterday nationalized its second largest bank and was also reduced to negotiating with Russia for an emergency loan to shore up its national finances.  Australia's central bank cut its interest rates, while the 27 nations in the European Union agreed to protect private savings by guaranteeing bank deposits of up to 50,000 euros for one year.

Yesterday's developments unfolded as financial leaders used increasingly stark terms to describe the peril the US and global economies face if the breakdown in financial systems isn't arrested.


Clockwise, from left:  Fr. William P. Leahy, S.J (President, Boston College); Jack Connors (Chairman, Connors Family Office); Robert Reynolds (President & CEO, Putnam Investments); Ellen Zane (President & CEO, Tufts Medical Center); R. Robert Popeo (Chairman, Mintz Levin); Joseph Grimaldi (Chief Executive Office, Mullen); The Honorable Therese Murray (President, Massachusetts Senate); John Fish (President & CEO, Suffolk Construction).

 

In Boston yesterday, Duncan L. Niederauer, the chief executive of the New York Stock Exchange, asserted that the refusal by investors to make even routine, short-term loans to businesses has been a crucial blow to the economy.

"The credit markets have finally tipped us over into a recession," Niederauer said to a lunch-time audience of Boston College's Chief Executives' Club.  "If we don't get the credit markets open, I'm afraid it's going to be dire."

The Fed sought to do just that yesterday.  In a move that essentially makes the central bank the business lender of last resort, the Fed said it would buy enormous amounts of corporate commercial paper, the short-term loans that are the lifeblood of businesses.  The intervention was prompted by a near-paralysis in the nation's credit markets, which businesses rely on to fund basic operations, such as paying workers and suppliers.

Such credit has become increasingly expensive, if available at all, as the investors who normally buy those loans have been spooked by teh rapid deterioration in the financial system and are unwilling to stomach any risk those loans would go bad.  Meanwhile, banks are also more reluctant to lend, choosing instead to preserve capital in case they are hit with unanticipated losses.

"Small businesses are  having trouble gong to their banks and increasing credit lines," said Grafton Willey, a certified public accountant with Tofias PC in Cambridge.  "I'm telling my clients to open lines of communications with alternative banks because you don't know what's going to happen with your bank when push comes to shove."


Members from the press fight for a word from Mr. Niederauer.

 


In a speech in Washington yesterday, Bernanke acknowledged that the Fed and US government have taken "momentous steps" to combat "a problem of histroical dimensions."  But he also appeared to concede that the combination of measures would still not be enough to immediately reverse the slide in the economy.

"All told, economic activity is likely to be subdued during the remainder of this year and into next year," Bernanke said.  "That heightended financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth."

Despite the Fed's actions, credit markets remained mixed yesterday, with one key corporate lending rate dropping substantially, while others spiked ever higher, indicating banks and other lenders are still nervous about funding loans.

Mutual fund manager Warren Isabelle of Ironwoood Investment Management in Boston said he was struck by how little effect the Fed's efforts have had so far.

"The Fed can't be the Shiva with eight arms that can do everything for everyone," he said.  "We're running out of bullets.  The point is, nothing works."

Meanwhile, news accounts in London reported that the British government today will disclose it will inject public funds into the nation's top banks and possibly take other steps, after their shares plunged becuase of concerns about loan losses and other financial problems.  Among the hardest hit was the Royal Bank of Scotland, parent of Providence-based Citizens Financial Corp., which fell 39 percent after Standard & Poor's downgraded its credit rating and said the outlook for the company is "negative."

Article by Casey Ross and Andrew Caffrey
Boston Globe
Wednesday, October 8, 2008