NEW YORK: Wall Street’s biggest crisis since the Great Depression forced the Federal Reserve and central banks around the globe to pump billions of dollars into the world banking system in an urgent bid to stop further damage.
The Fed plowed as much as $180 billion into money markets overseas. At home, the New York Federal Reserve acted to ease a spike in Wednesday night lending rates by injecting $55 billion into the banking system.
The Fed was joined by the European Central Bank with the British, Japanese, Swiss and Canadian banks in offering to swap currencies for dollars, taking the total to some $300 billion on offer.
Wall Street initially rallied, but it shed the gains and traded mostly lower by midday. Treasury securities and gold soared as investors fled to their relative safety. Asian stocks closed lower. European shares rose, but struggled to maintain the gains.
Worries about even the safest investments intensified as Putnam Investments suddenly closed a $15 billion money-market fund after institutional investors quickly pulled out cash.
And the two remaining major Wall Street investment banks — Morgan Stanley and Goldman Sachs Group Inc. — were under siege.
Morgan Stanley was in deal talks with US regional banking powerhouse Wachovia Corp. and the negotiations have advanced to a more formal stage, a source familiar with the firm’s plan said.
The No. 2 US investment bank, whose shares are down 50 percent this month, has also approached Chinese sovereign wealth fund China Investment Corp. about boosting its stake in Morgan Stanley, the source said, following a $5 billion investment late last year.
President George W. Bush canceled an out-of-town trip to stay in Washington and to huddle with Treasury Secretary Henry Paulson. Bush pledged to do all that was necessary to stem the crisis, whose fallout threatens the already fragile economy.
“The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence,” Bush said.
The move by the Fed and its overseas counterparts was aimed at boosting waning confidence and getting banks around the world to open their ever-tightening purse strings. Banks have been increasingly reluctant to lend to each other as distrust spread throughout the financial system.
A sharp rise in borrowing costs has worsened as bad bets on dodgy mortgage-backed securities claimed more Wall Street giants. The total amount of commercial paper fell by $52.1 billion for the week that ended Wednesday, as banks cut back the short-term loans companies from small garment factories to General Electric Co. depend on for their daily operations. At the same time, the interest rate on those short-term loans more than doubled, with rates for seven-day paper jumping to 4.5 percent from 2.5 percent.
Russia closed its stock exchanges for a second day yesterday as President Dmitry Medvedev pledged a 500 billion ruble ($20 billion) injection into financial markets to stem a dizzying plummet in share prices — and quash fears of a repeat of the country’s 1998 financial collapse.
Britain’s Financial Services Authority announced it would ban short-selling — when investors borrow stock in a company to sell it — in financial shares from 2300 GMT.
“While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets,” FSA chief executive Hector Sants said in a statement.
“As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector.”
The announcement came hours after British bank Lloyds TSB agreed to buy rival HBOS for 12.2 billion pounds ($21.8 billion) in a rescue takeover.
Investors in the US were dumping their money into 3-month Treasury bills, considered one of the safest investments around. Gold prices spiked to nearly $900 an ounce, up $45.
Demand for super-safe Treasuries surged Wednesday, sending the yield on the 3-month Treasury bill briefly into negative territory for the first time since 1940. That meant investors were willing to pay more for certain Treasury securities than they expected to get back when the investments matured, a rare event.
Putnam Investments said its board voted to close the Putnam Prime Money Market Fund effective at the close of business Wednesday. Putnam will distribute all fund assets to institutional clients. The fund had required a minimum $10 million initial investment. Putnam says the closure is not linked to the credit quality of the fund’s holdings, but is a reaction to “marketwide liquidity issues.”
The money manager said investors pulled out money en masse Wednesday, even though the fund has maintained a safety benchmark of holding at $1 in assets for each dollar invested.
Putnam says the fund has no exposure to the financial firms Lehman Brothers, Washington Mutual or AIG.