“The still unfolding global crisis” is getting worse, said Angel Gurria, secretary general of the OECD. Rattled equity investors have taken the same view, sending most major indices to new crisis lows this week. As Gordon Brown flew off to Washington to solicit support from Barack Obama for a detailed global rescue package, the economic data continued to deteriorate, with another drop in America’s pending home sales index and official confirmation that Switzerland has fallen into recession.
Federal Reserve chairman Ben Bernanke has officially launched a recently announced $1trn programme to bolster consumer lending. Private investors will be lent money to buy pools of loans that banks have had trouble selling in frozen markets, thus allowing banks to make fresh loans. Bernanke warned that the American economy and banking system may need even more money.
AIG needs yet more help
American insurance giant AIG provided another reminder that the financial crisis just keeps grinding on. It lost $62bn in the fourth quarter, a record quarterly loss, and received $30bn from the government, its fourth bail-out in five months. AIG is central to the global financial system, thanks to the vast number of credit default swaps it sold. If AIG failed, it would make Lehman’s collapse “look like summer thundershowers”, said Andrew Ross Sorkin in The New York Times. But the government hasn’t taken steps to ring-fence the rotten parts of AIG and has “just left the tab running”, said Breakingviews’s Lauren Silva Laughlin.
The latest headache for investors
A “nasty new ingredient” in the latest sell-off is fears of dividends being slashed, said Nils Pratley in The Guardian. As earnings tank and even healthy firms opt to hoard cash in case they have trouble borrowing, US payouts are set for their biggest percentage fall since the Depression. In Britain, ITV has scrapped its final dividend and HSBC cut its payout for the first time in decades. According to Kevin Gardiner of HSBC, some of Britain’s top firms’ dividends are covered less then two times by earnings. These include United Utilities, BT, Scottish & Southern Energy, BP and Shell, with the latter two comprising almost 20% of Britain’s overall dividend payments. BP now looks set to freeze its payout for the first time since 1999. As reinvested dividends are the key to healthy returns, it’s not just short-term losses equity investors now have to worry about – but long-term returns too.