On Sunday, the US Treasury and the Federal Reserve said they would lend money and buy equity if needed to rescue the two pillars of the US housing market, sending shares soaring early on Monday.

But the gains soon fizzled as analysts noted any direct government investment in Fannie Mae and Freddie Mac would further dilute existing shares – the last thing investors want.

Regional banks were also under fire as investors fretted about the possibility of more bank failures after regulators seized the mortgage lender IndyMac Bancorp late on Friday, following withdrawals by panicked clients.

National City Corp, responding to market rumours, said in a statement it was ‘experiencing no usual depositor or credit activity.’ But the Midwestern banking institution’s stock still plunged 14.71 per cent to US$3.77 after the statement.

Shares of other regional banks such as Washington Mutual and M&T Bank Corp also plummeted, with Washington Mutual down 34.8 per cent at US$3.23, and M&T Bank down 15.6 per cent at US$58.82. The S&P financials sub-index fell 5 per cent to 239.22, its lowest level since October 1998.

‘Bottom line is the market is in no mood to give anyone any benefit of the doubt right now,’ said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

Mr Kenny pointed to the long-term impact of Fannie Mae’s and Freddie Mac’s poor performance as the key drivers of investor uncertainty.

‘I mean, it’s nice to know that the government is willing to take unorthodox steps to calm the markets and to infuse confidence on the part of the investors, but this is a long road ahead of us here,’ he said.

The Dow Jones industrial average fell 45.35 points, or 0.41 per cent, to 11,055.19, while the Standard & Poor’s 500 Index lost 11.19 points, or 0.90 per cent, to 1,228.30. The Nasdaq Composite Index slipped 26.21 points, or 1.17 per cent, to 2,212.87.

After the closing bell, General Motors shares rose as much as 5 per cent on news that Chief Executive Rick Wagoner will announce the automaker’s second restructuring package in six weeks, in an attempt to cut costs and shore up investor confidence in the company. GM closed at US$9.38, down 5.4 per cent on the NYSE.

In the regular session, the Dow’s drop was cushioned by the performance of defensive stocks like McDonald’s and Coca-Cola, which tend to weather economic downturns because consumers still buy their products even in tough times.

McDonald’s shares rose 1.3 per cent to US$58.09, while Coca-Cola gained 1.4 per cent to US$50.96 on the New York Stock Exchange.

Apple shares gained 0.8 per cent to US$173.88 on Nasdaq after the company said it sold 1 million units of the new iPhone in its initial weekend, in line with analysts’ estimates.

On the other hand, shares of Fannie Mae fell 5.1 per cent to US$9.73, while those of Freddie Mac slid 8.3 per cent to US$7.11, both in NYSE trading. Both stocks had risen more than 20 per cent in trading before the opening bell.

Among regional banks, Fifth Third Bancorp tumbled 10.6 per cent to US$11.16 on the Nasdaq.

In other news, activist shareholder Carl Icahn blasted Yahoo on Monday for rejecting his joint proposal with Microsoft Corp, saying management was more focused on who would run the Internet company than on the details of the offer.

Shares of Yahoo fell 4.2 per cent to US$22.57 and Microsoft shares dipped 0.4 per cent to US$25.15, both on the Nasdaq.

Trading volume was low on the New York Stock Exchange, with about 1.41 billion shares changing hands, below last year’s estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.07 billion shares traded, below last year’s daily average of 2.17 billion.

Declining stocks outnumbered advancing ones on the NYSE by 3 to 1, while on the Nasdaq, more than two stocks fell for every one that rose. — REUTERS

“I hope I am wrong, but my view is that this crisis will take one to two years to stabilise,” Wee Cho Yaw, a banker for almost 50 years, told a university commencement ceremony, The Straits Times reported.

A bank spokeswoman confirmed the quotes when contacted by AFP.

The default crisis in the US subprime — or higher risk — mortgage sector ballooned into a world credit squeeze as banks tightened lending criteria. The crisis has also battered financial markets.

“What worries me is that no one seems to know the full amount of off-balance sheet securities circulating in the financial markets,” Wee was quoted as saying.

The subprime homeloans were repackaged into securities and sold to investors around the world. The wave of defaults led to billions of dollars in losses on those securities, damaging the balance sheets of major international banks.

“And this is what frightens me most — no one can tell me how much more will be written off…,” The Straits Times quoted Wee as saying.

Wee said regulators will need to ensure closer supervision of financial institutions and the “exotic trades” that have arisen over the past decade, the newspaper reported.

UOB has a regional presence, including subsidiaries in Malaysia, Indonesia, China and Thailand.

ONE of the most striking things about the past couple of months is how quickly the phrases ‘sub-prime crisis’ and ‘credit crunch’ have disappeared from mainstream consciousness, both replaced by ‘inflationary worries’ and ‘oil crisis’ as the stock market’s main bogeymen.

In its ‘Third Quarter Strategy Outlook’ dated June 27 for instance, BCA Research said the outlook will be greatly influenced by how oil prices behave: ‘The sustained advance in oil is choking off growth in the G-7 universe and could send equities to new lows. A reprieve in the oil crisis is needed for global equities to regain traction but there is no guarantee that such a reprieve will come anytime soon.’

As a result, the research outfit recommended going defensive and that ‘portfolio managers should further reduce their equity weightings below benchmark’.

There was virtually no discussion as to whether there could be more sub-prime shocks to come or whether the financial system has really recovered from the huge losses caused by a still-collapsing US housing market.

Similarly, most other outlook reports and stock market updates have assumed that the Bear Stearns bailout and the Fed’s actions in March/April have been sufficient to ensure that the sub-prime crisis is a thing of the past.

Readers would do well to ask themselves this question: how likely is it that a credit bubble that was about six years in the making (when the US Federal Reserve started an aggressive rate cutting campaign after the Internet bubble burst) can be so quickly and gently deflated in the space of two to three months?

Although most of the headlines over the past few weeks have focused on oil’s relentless climb and the inflationary-cum-growth implications, it is the complacency surrounding the sub-prime crisis that could well be the main problem equities will face over the next few months.

In fact, Wall Street may well be now waking up to this possibility – Bloomberg on Friday reported that it was sharp drops in financial stocks AIG and Merrill Lynch that dragged the S&P 500 to its five-year low and that the reason for the selling was mounting realisation that there are more sub-prime losses to come.

Bloomberg also reported that Lehman Brothers analyst Roger Freeman increased his second-quarter loss estimate for Merrill on expectations that sub-prime-related writedowns will be more than twice as big as previously projected.

The concerns over oil, inflation and growth are of course justified. BCA’s ‘Emerging Markets Strategy’ dated June 27 said these economies will witness a period of slower growth in the months ahead as inflationary pressures rise.

Although a major slump is unlikely, BCA said near-term risks are high and recommended investors ‘stay on the sidelines’.

Interestingly, US newspaper Barron’s June 23 issue reports (in the ‘Up & Down Wall St’ column) that fund manager Dewey Kessler from SDK Capital believes that the sub-prime crisis is now moving into its second phase, a phase that will see emerging markets transformed into ‘submerging markets’.

The process is said to have only just begun, starting with China, which although it is 50 per cent off its all-time highs, has still a long way to go.

However, it is possible that this support came via window-dressing activities ahead of the end of the first half and if so, the start of the second half could see this support withdrawn.

Moreover, US financial stocks are now being sold off as the realisation grows that the sub-prime credit crunch has not yet run its course.

All told, it looks like the worst is still not over yet. Forecasts earlier this year that the second half will be better than the first may well have to be revised.