LONDON (AFP) — The global financial firestorm tore through markets Wednesday, sending US and European shares plunging following a huge US bailout of insurer AIG and news that British bank HBOS could be taken over.
Wall Street fell hard on fears the US Federal Reserve's 85-billion-dollar (60-billion-euro) loan to American International Group might not be sufficient to shore up wobbly financial markets.
The White House said Wednesday that recent US economic news painted a "very mixed picture" but added that the United States had "the strength" to overcome the current financial crisis.
The Dow Jones Industrial Average fell 2.48 percent to 10,785.20 while the tech-heavy Nasdaq was down 3.47 percent to 2,138.06 in mid-afternoon deals.
The bailout for AIG , one of the world's biggest insurers, and news that HBOS was in advanced takeover talks with rival Lloyds TSB had earlier cheered Asian and European exchanges.
European markets had opened on a generally optimistic note after the rescue of AIG, the insurer yet another victim of the US sub-prime mortgage meltdown, but early gains on leading markets then switched to losses, then to gains and finally to steep losses at the close.
In London, the FTSE 100 index tumbled 2.25 percent to 4,912.40 points, while in Paris the CAC 40 lost 2.14 percent to 4,000.11 points. The Frankfurt Dax was down 1.75 percent at 5,860.98 points.
"The idea of the government assuming more liabilities from mismanaged financial outfits, whether secured or not, is not a comforting thought," said Patrick O'Hare, an analyst at Briefing.com.
Markets were turbulent as they digested the AIG rescue amid lingering anxiety about the real state of the world financial system following the dramatic collapse on Monday of US investment bank Lehman Brothers and the sale of Merrill Lynch to Bank of America.
The head of the International Monetary Fund, Dominique Strauss-Kahn, warned that the crisis shaking US and global markets posed a potential risk for world economic growth.
"We continue to anticipate a gradual global growth recovery in 2009, although the weekend's developments represent a potential added risk to the outlook," he said.
"The speed and scale of these events have added to short term uncertainties and further significant financial strains cannot be ruled out," he warned.
The IMF predicted growth of 3.9 percent in 2008, according to briefing published in late August. But the last official IMF prediction in mid-July foresaw growth of around 4.1 percent.
Earlier in the day Asian stocks ended mixed, with investors said to be cautious after the Federal Reserve held its base lending rate at 2.0 percent, arguing that the US economy was likely to achieve "moderate" growth over time despite the financial turmoil.
Dealers had been expecting a quarter point cut.
Markets in Seoul and Tokyo managed to reverse early losses and closed with respective gains of 3.0 percent and 1.21 percent.
But Hong Kong, which had opened 2.1 percent higher, fell back and closed 3.6 percent down, beneath 18,000 points and at its lowest level since October 4, 2006.
In Britain, HBOS became the latest victim of the turmoil as it confirmed it was in advanced takeover talks with Lloyds TSB.
"In the light of market speculation, the Board of HBOS plc confirms that it is in advanced talks with Lloyds TSB Group plc which may or may not lead to an offer being made for HBOS," HBOS said in a statement.
Prior to reports of the Lloyds TSB talks, HBOS shares had nosedived 52 percent to a low of 88 pence, as investors fretted it could be the next casualty.
The stock then jumped equally sharply, at one point rising to 220 pence before closing down 19.2 percent at 147.1 pence for a third successive day of heavy losses.
The US government got a 79.9-percent stake in AIG in return for the 85-billion-dollar loan , which followed hard on the heels of its takeover of US mortgage giants Fannie Mae and Freddie Mac.
The Fed said it had acted to help AIG to "protect the interests of the US government and taxpayers."
Analysts had warned that at an AIG collapse could trigger a wave of failures elsewhere.
AIG is deeply involved with financial institutions around the world and it was feared that its demise would have disastrous global consequences.
The size and scope of the Fed intervention also triggered political controversy in the United States.
Republican White House hopeful John McCain blasted US regulatory agencies as "asleep at the switch," blaming them for the massive AIG bailout that he agreed was necessary.
"On the bailout itself, I didn't want to do that... But there were literally millions of people whose retirement, whose investments, whose insurance were at risk here, and they were going to have their lives destroyed because of the greed and excess and corruption," McCain told ABC television.
House of Representatives Speaker Nancy Pelosi railed against what she called "our nation's largest bailout ever."
"An 85-billion-dollar loan is a staggering sum and is just too enormous for the American people to bear the risk," she said in a statement. "Congress will demand answers to prevent this from happening again."
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