Treasury weighs next move amid signs of global recession

McClatchy NewspapersOctober 24, 2008 

WASHINGTON — The global financial crisis deepened on yet another frantic Friday as the Treasury Department weighed expanding its rescue efforts to include insurance firms and investors everywhere sought refuge amid strong signs of a coming global recession.

Stock markets around the world took another pounding, with Asian exchanges losing double-digit percentages again. U.S. stocks zigged, then zagged on another volatile day of trading, but didn't crash as some feared.

While the Dow closed down more than 300 points, shares of giant insurers rose Friday on word that the Treasury may expand its planned cash injections for banks to include life insurers, on the grounds that like big banks, they're too important to fail.

"This is in line with Treasury's plan to increase confidence in the nation's financial institutions," said former Oklahoma Gov. Frank Keating, the president and chief executive of the American Council of Life Insurers. "Life insurers want to make sure consumers don't delay acting on their financial and retirement security needs out of concerns prompted by current economic conditions."

Treasury didn't disclose how or where it might inject capital into insurers, and the details are important because Treasury Secretary Henry Paulson repeatedly has noted that insurance needs to be federally regulated. State insurance commissioners now regulate the industry.

The Treasury isn't likely to assist property and casualty insurers that underwrite policies on homes and automobiles. Instead, it would focus on life insurers that offer annuities and other bank-like financial products.

An industry official, who spoke with McClatchy on the condition that his name not be used given the unfolding nature of the development, said that insurers such as Hartford Financial and Prudential Financial are the most likely to receive cash injections to shore up confidence in their solvency.

The Treasury announced earlier this month that it would inject $250 billion into banks, directing $125 billion to the nine largest national banks and allowing other banks until Nov. 14 to seek capital injections from Treasury to shore up their balance sheets.

Insurance industry officials confirmed that the industry approached the Treasury about the injections as a way to restore confidence amid signs that Americans were staying away from financial products of all sorts. The Federal Reserve in September took over American International Group, one of the world's largest insurers, taking a stake in the company in exchange for an $85 billion loan that later was increased.

"There is a lot of nervousness after AIG went under. A lot of people have their retirement money in these things and they want to make sure they're safe," said David Wyss, the chief economist for Standard & Poor's. "It's a tricky issue because the insurance companies are state regulated."

Insurance also got attention from another regulator on Friday. The Federal Deposit Insurance Corp. sought comment on a plan to begin providing deposit insurance up to $250,000 for accounts involving loan servicers who collect mortgage payments on behalf of the complex mortgage bonds held by investors globally. These bonds, called mortgage-backed securities, are at the heart of the U.S. financial crisis. The FDIC action aims to reduce uncertainty about the troubled financial products.

The developments in the insurance industry came late on a frantic day that saw trading in stock futures halted before the opening bell had been rung on Wall Street. Stock futures, instruments designed to measure where the market might go after opening, were so volatile that they triggered the so-called circuit breakers that halt trading temporarily.

Traders feared that the Dow Jones Industrial Average might trigger its own circuit breakers as they're currently calculated, suggesting a 1,100-point drop at opening. The Dow opened down by more than 500 points but pared those loses to close down 312.30 points, or 3.6 percent, to 8378.95. The tech-heavy Nasdaq finished off 51.88 points, or 3.2 percent, to 1552.03, the S&P 500 closed down 31.34 points, or 3.5 percent, to 876.77.

Since Sept. 15, when the financial crisis first hit in earnest, the Dow has lost 27 percent of its value.

In other signs of severe financial-market stress, the yield on 30-year Treasury bonds yield fell to 3.8676 percent early Friday. That was its lowest level since the 30-year bond came into common use in 1977. The falling long-bond rates are an indication that investors everywhere are fleeing perceived risks and jumping into U.S. government-issued debt as a haven.

The Organization of Petroleum Exporting Countries, meanwhile, announced at an emergency meeting in Vienna, Austria, that it would cut production by 1.5 million barrels a day. Oil prices settled down $3.69, or 5.4 percent, to $64.15 a barrel on the New York Mercantile Exchange. That's good for motorists because it will lower gasoline prices further in the weeks ahead.

Across the globe, stock-market wealth continued to be destroyed at a breathtaking pace on Friday. Japan's Nikkei exchange plummeted another 9.6 percent Friday and is approaching levels last seen in the early 1990s. Exchanges in South Korea and Hong Kong closed down 10.6 percent and 8.3 percent, respectively.

Meanwhile, Great Britain announced Friday that it's likely in a recession, reporting that its economy contracted 0.5 percent in the third quarter, a bigger-than-expected contraction on top of no growth in the second quarter. It was the first quarterly contraction since 1992, and it sent London's FTSE skidding 8 percent at the open but the index finished off 5 percent. Germany's DAX opened down 10 percent but finished the day off 5 percent.

"I think we're in the midst of a global recession. The developed economies are in recession and they account for half the global economy," said Mark Zandi, the chief economist for forecaster Moody's Economy.com. "The emerging economies are in total standing, but the rate of growth is slowing sharply so this will be deemed a global recession."

The global contraction is likely to compound the U.S. economy's problems. Exports, a rare bright spot for the U.S. economy for much of this year, will surely fall as foreign countries see their currencies slump against the dollar and economies shrink.

"We don't want (emerging economies) to go down the tubes because you'll see less economic activity there and here as a result," said Morris Goldstein, an expert in financial crises and the International Monetary Fund at the Peterson Institute for International Economics, a Washington-based research institution.

The IMF announced Friday that it had reached a tentative deal for $2 billion in emergency lending to Iceland, and it's in talks with several other nations. The international lender, on the sidelines for much of this decade during the global boom, is now negotiating loan packages with Hungary, Pakistan and Ukraine.

"With countries in balance of payment difficulties, the IMF has the tools to offer financing and help the situation," said Hung Tran, senior director of emerging markets policy at the Institute of International Finance, a global association of financial institutions. "They're providing the short-term financing that these countries need right now."

President Bush will host a summit of the world's 20 most developed economies on Nov. 15 to search for measures to ease the global financial crisis.

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