Last night the US Federal Reserve lopped another 0.75% off interest rates, taking them down to 2.25% – less than the 1% cut people were expecting, but still enough to send rates to their lowest level in three years. And there was even some relatively positive news from Wall Street: although both Lehman Bros and Goldman Sachs both ’fessed up to big write-downs and a severe decline in profits last quarter, the results weren’t anything like as bad as expected. After the weekend collapse and bail-out of Bear Stearns, more bad news might have sent the market plunging – instead, shares bounced back across the board, both in the US and Asia.
However, European markets weren’t quite so cheerful this morning. After a positive start shares tumbled again, with banking stocks again taking a hammering. As news emerged that the Bank of England is going to meet with the heads of various banks tomorrow to discuss new lending arrangements, investors seemed to panic – rumours that HBOS and Lloyds TSB were on the verge of running out of money sent their share prices plunging. Or there could be a more sinister reason: according to the BBC, the FSA is investigating whether traders have been deliberately spreading rumours to drive the share price down (so they can make a big profit by short-selling the stock).
The liquidity rumours have of course been fiercely denied by all concerned – but then they would, wouldn’t they? The bank-formerly-known-as-Bear did the same thing last week – and look what happened to that.
Lehman, whose shares have tanked this week amid rumours that it could be next in line, was also desperate to reassure the market yesterday. Apparently it has a cash pool of $34bn nestling in its back pocket in preparation for a rainy day – so all those jittery hedge funds have no need to panic, thanks very much.
Of course the figures from the US were still pretty grim. Both Lehman and Goldman suffered big losses on their dodgy mortgage and leveraged loan investments ($2bn for Goldman, $1.8bn for Lehman), and both saw big revenue falls in their fixed income divisions. This sent Goldman’s quarterly profits tumbling 53% to $1.5bn, while Lehman’s profits fell by 57% to $489m. But there were also some bright spots: Lehman’s advisory business and Goldman’s asset management division actually performed better than last time. So: painful, yes, but not quite the Armageddon that some analysts were predicting.
Still, the temperature is clearly rising, on both sides of the Atlantic. Yesterday, on a tour of breakfast TV studios, US Treasury Secretary Hank Paulson tried desperately to calm the panic. He admitted the economy has ‘turned down sharply’ – but refused to admit the US was in recession. The trouble is, he seems to be in an ever-shrinking minority these days...