Who Will Fall Next on Wall Street?

Fear is gripping Wall Street, as the financial crisis caused by the U.S. subprime mortgage debacle 13 months ago has entered a new and far more serious phase, the Wall Street Journal said yesterday.

The financial tsunami has swept through U.S. mortgage giants Fannie Mae and Freddie Mac, investment banks Lehman Brothers and Merrill Lynch, and insurance giant American International Group, fueling fear that few on Wall Street will survive the storm.

Investors are deserting stocks and scrambling to buy gold, oil and U.S. Treasury bills. Though the U.S Federal Reserve Board has pumped big money into its financial system, the market continues to suffer from a liquidity shortage.

○ ‘Believe no one to survive’

As the New York stock market rebounded and Washington bailed out the ailing AIG Tuesday, market watchers heaved a sigh of relief in believing the worst was over.

That relief didn’t last long. The New York Stock Exchange fell again Wednesday as a selling spree occurred over fears that nobody can be trusted. U.S. media also highlighted worsening business confidence.

Bank stocks led the sharp decline of the market. Share prices of AIG nosedived in the wake of the Fed’s announcement to rescue the world’s largest insurance company. Goldman Sachs, Morgan Stanley, and mortgage giant Washington Mutual, who has been mentioned as the next victim of the financial crisis, also saw their stock prices tumble.

Shares of Morgan Stanley, a company which had announced a better-than-expected second-quarter performance, fell 24.22 percent after dropping 40 percent at one point. Those of Goldman Sachs dropped 13.9 percent after plummeting as much as 24 percent.

Leading Korean-American economist Sohn Seong-won blamed aggravating trust in U.S. financial institutions for the steep decline despite the AIG bailout, saying “Since it cannot operate without confidence, the global economy is facing a major crisis.”

○ U.S. Treasury rate hits record low

AS Wall Street investors fled stocks and sought safer assets and government debt, the price of gold soared and U.S. Treasury three-month bill rates tumbled to its lowest level in five decades.

Gold for December delivery shot up as much as 70 dollars, or nine percent, closing at 850.50 dollars per ounce on the New York Mercantile Exchange, the biggest one-day gain in history. Even after the close, gold prices continue to climb more than 20 dollars in electronic trading.

Silver for December delivery also soared 11 percent to 11.68 dollars per ounce and platinum for October delivery rose 1.7 percent to 1,086.30 dollars.

Oil prices also soared. West Texas intermediate shot up 6.01 dollars or 6.6 percent from the previous day to close at 97.16 dollars.

U.S. Treasury three-month bill rates fell to its lowest level in 50 years, falling 63 basis points to 0.06 percent. The rate was 1.644 percent a week ago.

With liquidity rapidly drying up in the market, the three-month London interbank offered rate, the world’s leading barometer for short-term interest rates, rose 19 basis points to 3.0635 percent, the biggest gain since September 29, 1999.

The jump in the Libor rate showed the reluctance of banks to lend to each other due to growing jitters over the financial system.

Investors fleeing for safety from risky assets such as stocks might be perfectly rational, but such crowd behavior could cause a downward spiral with broader ramifications, the New York Times said.

As fear over the financial crisis intensifies, U.S. financial institutions are striving to survive through mergers and acquisitions.

The New York Times said Morgan Stanley, one of the two major Wall Street banks still standing, is considering a merger with Wachovia Corporation or another bank, saying both companies are in the initial stage of a merger deal.

Morgan Stanley CEO John J. Mack reportedly made an unsuccessful merger offer to Citigroup CEO Vikram Pandit.

CNBC said Britain’s HSBC Holdings and China’s CITIC Group are also eying Morgan Stanley, Wall Street’s second-largest investment bank.

Mortgage giant Washington Mutual has hired Goldman Sachs to negotiate a sale and will be put up for auction. Wells Fargo, JPMorgan Chase and HSBC are reportedly showing interest.

These moves are expected to bring about a seismic change to Wall Street.

higgledy@donga.com