American stock market investors are looking back on a “lost decade” of share buying, after the Dow Jones Industrial Average last night slipped to its lowest level since 1997.
The new lurch downwards came amid more turmoil for the country’s battered financial system, and reports that AIG, the insurance giant nationalised last September, is heading for the biggest quarterly loss in corporate history. At the same time, the effective nationalisation of Citigroup and other large banks appeared to move a step closer, although confusion still reigned over the Obama administration’s plans to right the financial system and the US economy showed no signs of recovery.
As worrying news and rumours accumulated throughout the day, the Dow accelerated downward, closing off 251 points at 7,114.78. That took out the lows of the last downturn in 2002 and brought share values back to a level not seen since 7 May, 1997. The wider S&P 500 index of US shares was also at an almost 12-year low last night. The late-hours declines on Wall Street presage a potentially rocky start to trading in London this morning.
“It is generally a market ‘no’ vote to what we’re getting from Washington,” said Hank Smith, chief investment officer at Haverford Trust in Philadelphia. “It certainly doesn’t inspire confidence when you do break multi-year lows, so it’s just feeding into a real negative cycle that we’re in right now.”
AIG is expected to post something close to a $60bn loss for its most recent quarter, as it picks through the wreckage of insurance contracts it had written on risky mortgage and commercial real estate derivatives. The London unit which wrote most of this insurance is under investigation by the Serious Fraud Office, it was revealed this month. Because of the complexity of this derivatives insurance – a type of contract called a credit default swap – AIG’s collapse last September had threatened to bring down the global financial system. To avoid that, the US government nationalised it, but it has twice had to revise the terms of loans granted to the company as the scale of its difficulties has mounted. One of the options under consideration yesterday was a fresh injection of money from the US government or the central bank, the Federal Reserve. More than $150bn of public funds has been injected in the past five months.
The $60bn loss, due to be announ-ced next Monday, could force the company into bankruptcy unless new financing is arranged before then, analysts said. A board meeting is believed to have been set for Sunday. The company itself issued a statement saying it was not considering a legal filing for bankruptcy, although sources confirmed it has hired the law firm Weil, Gotshal & Manges.
Underscoring the financial uncertainty, JPMorgan Chase said it would slash its dividend by 87 per cent last night “as a precautionary measure”. The move would save it $5bn a year. Although the bank has taken $25bn in investment from the US government, JPMorgan chief executive Jamie Dimon said last night that “we were not asked by anyone to do this”.
The only two shares in the Dow Jones which went up yesterday were Bank of America and Citigroup, because of suggestions that new plans for the government to increase their stakes in troubled banks might stop short of full-scale nationalisation.