Economic Woes Expand

Lehman Bros. Merrill Lynch. Fannie Mae. Freddie Mac. Countrywide Financial. Bear Stearns. In staggering succession, some of Wall Street's oldest and biggest firms have been seized, failed outright or merged into other companies. The credit crunch, which began in the real estate market, has emerged as a full-blown financial crisis threatening the global credit markets. Thanks partly to nimble emergency moves by the U.S. government, the financial system has avoided a full-scale collapse. There is widespread concern, however, that other financial institutions could be brought down by the sliding home mortgage market. Two Wall Street icons are about to vanish as independent companies. Lehman Bros., which began 158 years ago as Alabama cotton traders, filed for bankruptcy protection. And Merrill Lynch, whose bull mascot has been Wall Street's iconic symbol of optimism since 1970, agreed to be absorbed by Bank of America. Analysts say too many companies have borrowed too much to buy high-risk assets — mainly securities backed by subprime mortgages, which are loans made to borrowers with poor credit. Now, companies that own those securities must write off their losses and raise fresh cash.

The Federal Reserve said Tuesday night it would lend up to $85 billion to flailing insurance giant American International Group, saying the move was necessary to protect the financial system. The action averts a bankruptcy filing by AIG, which has been struggling to raise capital after crippling losses on protection it sold to investors in mortgage-backed securities. It also faced additional pressures to meet collateral calls from investors after its credit rating was downgraded by four rating agencies Monday night. The senior management of AIG will be tossed out, and the government will effectively be in control of the company. The government will have a 79.9% equity interest in AIG and the right to veto the payment of dividends to common and preferred shareholders. The Fed's decision, made with the Treasury Department's support, came just days after the Treasury and Fed refused to bail out investment bank Lehman Bros. The main difference between the two situations: AIG is so huge and its operations so intertwined in the financial system that the Fed feared an AIG failure could harm the broader economy.

WASHINGTON — Urgently trying to keep cash flowing to prevent a Wall Street meltdown, the Federal Reserve on Tuesday pumped $50 billion into the nation's financial system to help ease credit stresses. Tuesday’s cash injection was in the form of short-term repurchase agreements in which the Fed makes the loans, accepting agency and mortgage-backed securities as collateral. A repurchase agreement or repo, is a contract in which the seller of securities, in this case financial companies, agree to buy them back at a specified time at a specified price.

WASHINGTON — The Federal Reserve on Tuesday voted unanimously to keep a key interest rate at 2% while acknowledging that turmoil in financial markets has "increased significantly" and the economy appears to be weakening. In a statement released at the end of a one-day meeting, the Fed's policymaking Open Market Committee said it has "significant" concerns about both inflation and the slowing rate of economic growth. "Strains in financial markets have increased significantly and labor markets have weakened further," the Fed said.

WASHINGTON (Reuters) — Construction of new homes plummeted to a 17-1/2-year low in August as builders scaled back sharply to try to cope with the deep housing slump. The Commerce Department said Wednesday that starts on new homes fell 6.2% from July, to a seasonally adjusted annual rate of 895,000, lowest since 1991 and well below the 950,000 rate that economists surveyed by Reuters had anticipated. With home foreclosures soaring and prices falling, builders are clearly bracing for a protracted downturn. New applications for building permits declined 8.9% in August to an annual rate of 854,000.

MOSCOW — Russian stock exchanges halted stock and bond trading Wednesday after one of the worst falls since the country's 1998 financial collapse, and the Finance Ministry pledged $60 billion to help local banks. Investors have dumped Russian assets after global financial turmoil combined with falling oil prices and Moscow's war with Georgia to form a toxic cocktail for the Russian markets.

VIENNA — A “silver lining” to the current economic woes is that oil prices fell again Tuesday, slipping below $92 a barrel, reflecting market fears that the credit crisis will be a drag on global economic growth and restrain demand for crude. OPEC's production cut of 520,000 barrels a day earlier this month has failed to stem the decline. The 13-nation group said oil demand in the U.S. fell by 800,000 barrels a day last month due to the slow economy and high retail prices.