The euphoria that followed the government’s takeover of mortgage giants Fannie Mae and Freddie Mac over the weekend ends abruptly as rumours spread that Wall Street giant Lehman Brothers Holdings Inc. is having trouble raising cash.
Lost glory: A file photo of a pedestrian walking by the Lehman Brothers Holdings Inc. headquarters in New York. Michael Nagle / Bloomberg.
The fourth largest US investment bank posted a nearly $3 billion (Rs14,550 crore today) loss in its second quarter, which ended in May, and the loss in the quarter that ended 31 August is expected to be just as bad. For weeks, Lehman had been in talks with state-run Korea Development Bank about an infusion of capital to help offset the losses from months of trading losses and mortgage-related write-downs.
Several banks including UBS AG, Citigroup Inc. and Merrill Lynch tapped foreign investors for money over the past year. But South Korea’s financial regulators, worried about Lehman’s growing losses, turn off the spigot before the 158-year-old New York investment bank can drink. Lehman shares plunge 45% on Tuesday to $7.79. That puts Lehman’s market value at just $5.4 billion. It was $36 billion a year ago. In a sign of trouble to come, shares of American International Group Inc. tumble 19% as investors ponder how the insurer might make good on insurance it has sold to Lehman debtholders.
To calm investors, Lehman says it will move up the announcement of its quarterly results by more than a week to early Wednesday morning.
In other news: The National Association of Realtors reports that pending sales of homes fell 3.2% in July.
Market reaction:The Dow Jones Industrial Average loses 280 points, nearly erasing the previous day’s 290-point gain following the Fannie-Freddie takeover. The Standard and Poor’s 500 index falls 3.41%, and the Nasdaq composite index declines 2.64%. Bond prices jump as investors seek the safety of government debt.