Last Updated: Tue Nov 02, 2010 12:39 pm (KSA) 09:39 am (GMT)

Financial crisis wreaks havoc on global markets

Amid fears of a full blown crisis in the global financial system, the U.S. Federal Reserve on Tuesday pumped $50 billion into the financial system to help ease credit stresses, a day after upheaval in the American financial system sent shock waves through the stock market, producing the worst day on Wall Street in seven years.

IMF chief Dominique Strauss-Kahn, meanwhile, warned the global financial crisis is not over and more banks could close, possibly leading to the disappearance of the independent investment houses.

"The fact that a certain number of banks in the United States are restructuring shouldn't lead to panic," he told AFP in the wake of Monday's collapse of major U.S. investment bank Lehman Brothers.

"But these events add to the uncertainty, and financial tensions cannot be excluded in the short term," with banks other than Lehman Brothers also in a bad position, he said.

Predicting "a narrower global financial sector", the International Monetary Fund managing director said certain "players will disappear", particularly in the United States, with the possible gradual disappearance of independent investment banks like Lehman or Merrill Lynch.

Lehman Brothers was seen in financial markets as one of the big four United States investment banks, along with Morgan Stanley, Goldman Sachs and Merrill Lynch, which announced on Monday it is to be taken over by Bank of America in a 44 billion dollar deal.

As investors on Monday digested the failure of one of Lehman Brothers, one of Wall Street's most venerable banks, and wondered which domino would be next to fall, the Dow Jones industrial average lost more than 500 points, more than 4 percent, its steepest point drop since the day the stock market reopened after the Sept. 11, 2001, attacks. Stocks were headed for a lower opening Tuesday.

The Federal Reserve Bank of New York's action Tuesday comes in addition to its regular market operations to inject $20 billion into the system slated for the day.

The maneuver takes place as Federal Reserve Chairman Ben Bernanke and his central bank colleagues prepare to meet to decide their next move on interest rates and conduct a fresh assessment of U.S. financial and economic troubles.

In Moscow, Russia's main RTS stock market suspended trading on Tuesday after falling by more than 11 percent, a spokeswoman said, following the closure of the country's second, ruble denominated Micex market.

London and Tokyo also tumbled more than four percent on Tuesday, hitting their lowest levels for more than three years.

On foreign exchange markets, the dollar fell to more than three-month lows against the yen.

U.S. Treasury Secretary Henry Paulson canceled a scheduled speech to focus on developments in financial markets, a Treasury spokeswoman said.

David McCormick, the Treasury's undersecretary for international affairs, will deliver the 1:30 p.m. EDT (1730 GMT) speech on the economy and housing markets in Paulson's place at the Brookings Institution in Washington.

"Paulson is focused today on staying on top of market developments," Treasury spokeswoman Brookly McLaughlin said in a statement.

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