Panic hints at problem ahead

Hours before Australian equities and credit markets opened, many brokers knew the local bourse was in for a hiding. Wall Street had tumbled 4% and, like the day before and the day before that, the slide was triggered by seismic quakes in the world's financial system.

Indeed, the financial universe is being reshaped nightly. There are many brokers and bankers who are not sleeping through to dawn. They are listening to the last hours of reports from Wall Street and trying to reassure themselves that they will have a job at Christmas.

Their concerns are, with respect, nothing concerning the nightmares of central bankers. At 3am New York time (5pm AEDT), the US Federal Reserve yesterday revealed it was co-ordinating what has become the world's biggest liquidity push, pumping in more than $US180 billion ($A223 billion) through swap facilities with central banks in Canada, England, Japan, Switzerland and the European Central Bank.

That followed the collapse this week (after midnight) of the 148-year-old Lehman Brothers investment bank and the forced takeover of Merrill Lynch by Bank of America. Now the venerable Morgan Stanley, which a week ago was considered solid but whose shares tumbled 42% in three days, is considering glueing its balance sheet to the smaller Wachovia Bank.

Across the Atlantic, Britain's biggest lender for residential mortgages, HBOS, which owns BankWest in Australia, agreed to a pound 12.2 billion ($A27.6 billion) takeover by Lloyds Bank.

And in Russia, the Government offered a 90-day loan of $US44 billion to three of the country's most important banks - OAO Sberbank, VTB Group and OAO Gazprombank - to ensure Moscow's banking system did not entirely seize.

Last night, Russian officials said they would inject $US20billion into the country's sharemarket to support confidence.

Central banks are flooding the financial systems with cash by selling bonds and extending massive loans or rescue plans to the troubled lenders and insurance houses considered most crucial to global transactions.

This is the biggest bail-out since the 1920s and its ramifications will be felt for years. The institutions that are teetering are crucial to the efficacy of the world financial system, and they are not going to be allowed to fail entirely.

In the street, however, shareholders in these same institutions are dumping their investments. They are going straight to what they believe are safe havens of cash or cash-equivalent securities such as government-backed Treasury bonds, bullion or goldmining stocks.

While buying support came from so-called value funds, or contrarians, and from mainstream funds based in Europe and Asia that were retreating to the relative safety of the Australian market, brokers said much of the early selling yesterday was driven by US and Japan hedge funds. The hedge funds are being forced to abandon highly geared investments because their access to debt financing has evaporated as banks topple.

Widespread selling also came from superannuation funds and from retail investors, who recognise that the boom conditions of the past decade are truly over.

Household wealth is evaporating rapidly, jeopardising the plans of retirees and prospective home buyers - indeed, anyone.

In Paris, the ratings agency Standard & Poor's warned that the global market turmoil was not at an end. More dramatic write-downs lie ahead for financial institutions that traded in soured US mortgage-backed securities.

The agency expects a second and "large" wave of write-downs to come in the next six months as institutions in Europe and Asia that bought these US mortgage-backed securities grapple with their own bad debt exposures. That will force those institutions to sell assets and raise fresh funds, if they can.

Where does it end? The head of the Australian operation of one of the world's biggest banks suggested, without irony, it would end in depression, not simply recession. And at that point, in comes the big money - the billionaires of China, India and the Middle East, and the huge sovereign funds.

He may be overstating it, though. Honestly, who knows?

Sure, all the events of the past 18 months - the failure of the US subprime lending market, the pressure on debt-laden companies and the subsequent slide in the sharemarket - have pointed strongly to a shake-out of this order.

And many forecasters warned that when investor confidence vapourised, as it has this week, the capitulation, liquidation and rush to cash would occur at breakneck speed.

We are careening headlong, blind, into a new financial world order.