Paulson: “Some financial institutions will fail.”

Dow slides 189 points despite global interest rate cuts

Dow Jones Industrial Average falls for six successive days, losing 14.7% of its value

Specialists check a screen on the floor of the New York Stock Exchange on Wednesday. Photograph: Richard Drew/AP

A gloomy day on Wall Street ended with another plunge in stocks after the US treasury secretary, Henry Paulson, warned that financial “turmoil” will not end soon and that more banks are likely to bite the dust.

Cuts in interest rates around the world failed to provide any lasting cheer as the fell by 189 points to 9,258. The index has fallen for six successive days, losing 14.7% of its value, amid signs of weariness and capitulation among investors.

Leading US retail chains including Target and JC Penney produced poor trading figures, fuelling concerns of a high-street slowdown. America’s largest aluminium producer, Alcoa, saw its shares slide by 15% as it cut back on capital spending after a dive in profits.

At a press conference to provide details of the US government’s $700bn bail-out package, the treasury secretary said it would be several weeks before the treasury is ready to begin cleaning up banks’ balance sheets by buying distressed mortgage-related assets.

In a prepared statement, Paulson used the word “turmoil” seven times to describe the financial environment and he made efforts to limit expectations on the rescue package: “One thing we must recognise – even with the new treasury authorities, some financial institutions will fail.”

Paulson stressed the need for governments to work together globally, adding: “Patience is also needed because the turmoil will not end quickly and significant challenges remain ahead.”

The struggling insurance company AIG was given a fresh loan of $37.8bn by the Federal Reserve last night, on top of last month’s $85bn emergency credit line, as it struggled to rebuild financial stability.

AIG has come under fire from the presidential candidate Barack Obama, who suggested during a debate on Tuesday that executives should be fired for spending $440,000 on a corporate getaway at a Californian resort last month. AIG’s chief executive, Edward Liddy, yesterday defended the beach-side get-together, saying that 90 of the 100 attendees were independent insurance agents, although he said the company was “re-evaluating” its outgoings “in the light of the new circumstances in which we are all operating”.

Wild swings on the markets continue to unnerve traders who said yesterday’s half-point cut in interest rates had come as little surprise. A temporary ban on “short” selling in financial stocks ends today in the US, posing the possibility of fresh volatility.

David Wyss, chief economist at Standard & Poor’s, said the heavy losses in stock markets around the world signal that markets are determining that the credit crisis won’t likely be resolved soon.

“There was a general disregard for risk going on in financial markets around the world, it wasn’t just the US,” he said. “Now they’re waking up to risk.”

The price of gold, a traditional safe haven in volatile times, jumped by $24.50 to $906.50 per ounce. Oil fell to a ten-month low of $88.95 on New York’s Nymex exchange on expectations of weak industrial activity.

On the stock market, Bank of America’s shares fell by 7%, taking their five-day fall to 42%, after the North Carolina-based bank was forced to offer shares at a steep discount to persuade investors to stump up $10bn for a fundraising to strengthen its balance sheet.

Andrew Clark in New York
Wednesday October 08 2008 23:03 BST

Source: The Guardian