Stocks Tumble Worldwide, Government Bonds Rise on Bank Concerns

By Michael Patterson and Adria Cimino

Sept. 29 (Bloomberg) -- Stocks around the world tumbled, the euro and the pound plunged and bonds rose as governments raced to prop up banks.

Europe's Dow Jones Stoxx 600 Index declined 3.2 percent and the MSCI Asia Pacific Index lost 2.7 percent after Dexia SA sank the most since it began trading 12 years ago and ICICI Bank Ltd. retreated to a two-year low. Futures on the Standard & Poor's 500 Index fell 1.7 percent as Wachovia Corp. tumbled 91 percent. Citigroup Inc. agreed to buy the company's banking operations in a transaction the Federal Deposit Insurance Corp. helped arrange.

The British pound dropped the most against the dollar in 15 years and the euro weakened after European governments stepped in to rescue Bradford & Bingley Plc, Fortis, and Hypo Real Estate Holding AG. The cost of borrowing in euros for three months soared to a record as banks hoarded cash. Commodities fell, led by oil, copper and lead. Investors fled to the safest securities, sending yields on U.S. government notes lower for a second day and European two-year note yields to the lowest in 5 1/2 months.

``This credit crisis is pretty deep and it's pretty deep throughout the financial industry,'' Jason Pride, director of research at Haverford Trust Co., which oversees about $6.5 billion in Radnor, Pennsylvania, said in a Bloomberg Television interview.

The MSCI World Index of 23 developed countries lost 1.8 percent to 1,227.75 at 9:14 a.m. New York time, the biggest decline since Sept. 17, the day before the U.S. bank bailout plan sparked the index's steepest two-day rally in 38 years. The MSCI Emerging Markets Index dropped 3.9 percent as India's Sensitive index tumbled 3.9 percent and Russia's Micex Index lost 5 percent.

Pound, Euro

The British pound slid as much as 2.6 percent to $1.7959, from $1.8445 at the end of last week, the biggest intraday decline since June 4, 1993. The euro fell as much as 2.1 percent to $1.4302. U.S. Treasury two-year note yields declined 10 basis points to 1.99 percent, while the yield on European two-year notes dropped as much as 20 basis points to 3.46 percent, the lowest since April 15.

A $700 billion package to shore up banks hammered out by Treasury Secretary Henry Paulson and congressional leaders over the weekend failed to convince investors it will shore up banks saddled with growing mortgage losses. The crisis that began with bad home loans to subprime borrowers in the U.S. is threatening to push the global economy into a recession as consumers lose confidence and banks cut back on lending.

September Retreat

The MSCI World retreated 8.7 percent this month as the U.S. seized the two largest mortgage-finance companies, Fannie Mae and Freddie Mac; Lehman Brothers Holdings Inc. filed for bankruptcy; Merrill Lynch & Co. agreed to sell itself to Bank of America Corp.; American International Group Inc. was taken over by the Treasury; and Washington Mutual Inc. was seized by regulators in the biggest U.S. bank failure in history.

Financial institutions worldwide have reported more than $550 billion of credit losses and asset writedowns since the beginning of 2007, according to data compiled by Bloomberg.

Money-market interest rates jumped today after the U.K. Treasury seized Bradford & Bingley, Britain's biggest lender to landlords, and governments in Belgium, the Netherlands and Luxembourg threw an 11.2 billion-euro ($16.3 billion) lifeline to Fortis. Germany guaranteed a 35 billion euro loan to Hypo to fend off insolvency.

The euro interbank offered rate, or Euribor, rose 10 basis points to 5.24 percent, the biggest jump since June, the European Banking Federation said. Singapore's benchmark rate for three- month U.S. dollar loans rose to the highest level in eight months.

Wachovia Tumbles

The cost of protecting European corporate bonds from default rose, with the Markit iTraxx Europe index of 125 companies with investment-grade ratings increasing 9 basis points to 125, according to JPMorgan Chase & Co. prices. The Markit iTraxx Financial index of 25 European banks and insurers climbed 13.5 basis points to 134, CMA Datavision prices show.

Wachovia declined 91 percent to 94 cents. Citigroup will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the FDIC said today in a statement. The FDIC will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants. Citigroup shares fell 5.4 percent to $19.07.

Dexia dropped 28 percent to 7.28 euros in Brussels trading after Le Figaro said the world's biggest lender to local governments may soon announce a plan to raise capital in a bid to reassure markets. Dexia's board will meet today to review ``the financial and markets situation,'' a spokeswoman said.

ICICI, the Indian lender with the biggest overseas securities holdings, lost 12 percent to 493.3 rupees.

Crude oil slumped almost $6 a barrel, while copper, lead, corn, silver and rice all dropped more than 2 percent, leading the S&P Goldman Sachs Commodity Index to a 4.5 percent decline.

Lawmakers reached an agreement yesterday as House Republican leaders backed away from opposition to Paulson's proposal after it included plans to create insurance for mortgage-backed securities. The House and Senate are scheduled to vote on the bill early this week, although it wasn't clear last night that it has sufficient votes to pass in the House.

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Adria Cimino in Paris at acimino1@bloomberg.net.

Last Updated: September 29, 2008 09:27 EDT