Bank buy-out sends world markets plunging

Worldwide markets recorded heavy losses today following the emergency bail-out of US investment bank Bear Stearns.

But the Dow Jones industrials recovered towards the end of trading to finish up about 21 points, despite being down 200 points in early trading.

The rollercoaster US session came after JP Morgan Chase & Co’s government-backed buy-out of Bear Stearns at the weekend.

The buy-out was aimed at averting bankruptcy by Bear Stearns and a spreading crisis of confidence in the global financial system sparked by problems in the US sub-prime mortgage market.

The Federal Reserve, the US central bank, backed the buy-out and also lowered the rate it charges to lend directly to banks by a quarter-point on Sunday night.

It is also expected to lower its general interest rates by up to 1% tomorrow.

President George Bush said: “One thing is for certain – we’re in challenging times. But another thing is for certain – that we’ve taken strong and decisive action.”

He went on: “The Federal Reserve has moved quickly to bring order to the financial markets.”

He said the actions had “shown the country and the world that the United States is on top of the situation”.

The president said it showed that the US financial institutions were strong and that the capital markets were “functioning efficiently and effectively”.

Mr Bush added: “In the long run, our economy is going to be fine. Right now we’re dealing with a difficult situation.”

But Democratic presidential candidate Barack Obama said: “History will not judge President Bush kindly for his failure to act in a way that could have prevented or alleviated this economic crisis.

“There have been few administrations so out of touch with the concerns and the struggles of working Americans and so beholden to the lobbyists and special interests who blocked any kind of regulatory oversight of the financial sector.

“Whether it was sub-prime lending, credit cards or bankruptcy laws, Washington has allowed these special interests to prevent sensible policy that could have prevented the most serious effects of the current predicament.”

He went on: “We are the United States of America, and each time we have faced moments of adversity in the past – some much greater than this – we have summoned a spirit of co-operation and innovation to emerge stronger and more prosperous than we were before.

“But it will take work, it will take time, and it will take leadership that recognises that we are all part of the same economy, and that economy must work for every American in order for America to prosper in the 21st century.”

His rival for the Democratic Party’s nomination, former first lady Hillary Clinton, echoed his criticism and said it was a “moment of great unique uncertainty in our financial markets”.

“The crisis that began in the sub-prime mortgage market has spilled over and now poses a broader threat,” she said.

“In these times of stress and uncertainty, we need to be vigilant, to do everything in our power to maintain confidence in our financial system.”

The dollar sank to a record low against the euro and hit a 12-year low against the Japanese yen, while gold prices rose to another record high.

In the UK, the FTSE 100 index ended down 3.9% amid investors’ fears that the collapse of one of Wall Street’s biggest names means that the credit crunch is intensifying.

The Bank of England said it would offer an extra £5 billion of reserves into the short-term money market because of conditions, and the Bank of Japan and the Royal Bank of Australia also made more funds available.