The price per barrel of oil has fallen to below $40 and ended the day at $39.73.

Demand for oil is still continuing to fall due to the world economic crisis. I thought again that the price had hit a threshold at around $45 and the idea of $25 per barrel put forward by Merrill Lynch seemed way off, but is looking ever more likely!

This new low price has happened despite output cuts by Opec of some 2.2 million barrels per day earlier this month in order to hold up the price for the Opec members.

With China cutting its interest rates again this week to 5.31% due to economic problems hitting their country, which is leading to lower demand for oil which is putting further downward pressure on the oil price, after such high demand earlier this year which pushed the price up to a record $147 a barrel.

The price of crude oil has continued its downward spiral and has now hit a low that was last seen in early 2005.

It will be interesting to see where the bottom is on the oil price and I will admit that I thought this had been reached at the $50-55 price. However, Merrill Lynch has reported that the price could fall as low as $25 per barrel if the global recession extends to China. Demand for oil has fallen dramatically with most of the major economies falling into recession including the US, the UK, Japan and the Eurozone.

The leaders of all major world economies are trying to stimulate growth and are trying to put confidence back into the system and in particular the banking system. With the UK’s Bank of England drop in interest rates to 2% on Thursday of this week and the US Treasury dropping their bank rate to 1% and the Eurozone to 2.5%.

Again, I call for small businesses to report how they are doing and what trades are being most affected by this down-turn. We see the headlines in the news about household named businesses such as Woolworths and MFI both going into receivership, but it is the small businesses that make up the majority of the world economies and it would be good to get feedback on where things stand.

Henry Paulson has urged Congress to move quickly to pass a $700bn (£382bn) package to tackle the worst financial crisis for decades.

The US Treasury Secretary plans to set up a fund to buy back much of the bad debt held by banks and financial institutions around the world.

Speaking on US television, Mr Paulson said the financial market turmoil was a “humbling experience”.

He also urged other countries to adopt similar schemes to shore up confidence.

“I wouldn’t bet against the American people and I wouldn’t bet against the long-term fundamentals of this country.

“But this is a humbling experience to see such fragility in capital markets and to ask how did we ever get here,” Mr Paulson told NBC’s Meet the Press.

Congressional and Treasury officials have been meeting over the weekend to try to get the package signed into law within a matter of days.

International rescue

Under the draft Treasury plans, financial institutions with “significant operations in the US” are eligible to sell or auction their bad debts to Treasury fund.

“Banks eligible to sell to this Treasury-owned bank would be banks with significant operations in the US – so, for example, Royal Bank of Scotland and Barclays would be able to dump their toxic mortgage-related investments on the Treasury”

The fund would aim to sell off these mortgage-related debts in the future.

That would mean a number of British banks could sell their soured assets to the Treasury-owned bank – via an auction – according to the BBC’s business editor, Robert Peston.

On Saturday, US President George Bush defended the plan, saying the cost to taxpayers of shoring up markets was better than the alternative of job losses and diminished pensions.

“I’m convinced that this bold approach will cost American families far less than the alternative,” he said.

“Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars and college tuitions.”

Regulations overhaul

The Treasury has revealed little detail of its ambitious package, other than the estimated cost of buying these bad debts and who is eligible for the scheme.

… the world is changing very fast, but the governance of the global financial system has not caught up with it and that’s what’s got to change

Gordon Brown

Mr Paulson has asked for congressional approval to raise the amount the government can borrow to $11.3 trillion (from $10.6 trillion) to cover that cost.

Analysts say the devil was in the detail, for example, how much the Treasury will pay for the banks’ toxic assets.

Some members of Congress are uneasy at the thought of the taxpayer taking on hundreds of billions of dollars of currently worthless debt, the BBC’s North America editor Justin Webb says.

But the leader of the Democrats in the House of Representatives, Steney Hoyer, has said he expects quick action.

After a week of turmoil, stock markets around the world rallied on news of the rescue plan, with the UK’s FTSE 100 closing on Friday with its biggest one-day gain.

The US Treasury Secretary also said that the government would be stepping up action to increase the availability of capital for new home loans.

Once this difficult period was over, Mr Paulson said, the government’s next task would be to overhaul bank regulations.

‘New economy’

The UK prime minister said on Sunday that one of the lessons from the global financial crisis is the need for international regulation to be brought up to date.

Gordon Brown told the BBC: “We’re in a new economy, a global financial economy, the world is changing very fast, but the governance of the global financial system has not caught up with it and that’s what’s got to change.”

Mounting fears that the credit crisis is beginning to spread out through the financial system have rocked shares and companies recently.

Investment giant Lehman Brothers collapsed last Monday, rival Merrill Lynch was bought out by Bank of America, and the US government has bailed out insurer AIG with an $85bn rescue package and state-backed mortgage lenders Fannie Mae and Freddie Mac.

News reported by The BBC

US consumer prices fell in August for the first time in nearly two years due to lower energy costs, data shows.

Labor Department figures showed the Consumer Price Index (CPI) was 0.1% lower month-on-month, and followed July’s 0.8% increase.

However on a yearly basis, prices were 5.4% higher.

The news comes as the US central bank meets to decide on interest rates, with some analysts saying the drop could make a rate cut more likely.

“If the Fed is thinking of cutting interest rates this afternoon, this gives them a little more freedom to do that,” said Robert McIntosh, lead economist at Eaton Vance.

It had been widely expected that the Federal Reserve would opt to leave interest rates on hold at 2%.

But in light of significant turmoil in the financial markets, and uncertainty over the health of the world’s largest economy, there are expectations that the central bank could lower rates.

The demise of Lehman Brothers and uncertainty over the future of insurance giant AIG, as well as the acquisition of Merrill Lynch by Bank of America have all added to market jitters.

News reported by The BBC

Chancellor Alistair Darling says that laws will be introduced to tighten the rules governing the UK banking system.

His comments came in a BBC interview as the world digested the fate of two of Wall Street’s historic banks – Lehman Brothers and Merrill Lynch.

He called the resulting turmoil in global shares inevitable, but added that “on the positive side” UK regulators were taking action.

Separately, UK bank Barclays said it is looking to buy certain Lehman assets.

Speaking to the BBC, Mr Darling said that governments, central banks and regulators around the world have made it clear they will do “everything that they possibly can to maintain stability in the financial system”.

He said this was demonstrated on Monday after the Bank of England, European Central Bank and US Federal Reserve all made billions of dollars of additional funds available to help out the money markets.

But he added: “Now that doesn’t mean that any government or regulator can say to people ‘look, nothing is going to go wrong’, and that we can somehow stop the huge economic forces and changes that are taking place at the moment.

“But what it does mean as we showed with Northern Rock last year, that there we had a problem; if we hadn’t done something about it, it could have infected the rest of the banking system so we took action and eventually we had to take Northern Rock over.”

News reported by The BBC

Bank of America is to buy Merrill Lynch in a deal worth $50bn (£28bn) that will create a new financial giant.

The deal came amid a hectic weekend on Wall Street, with Lehman Brothers announcing that it would file for bankruptcy protection.

There were worries that Merrill would be the next bank to lose the confidence of investors as it has been hit hard by bad mortgage debt.

Merrill has written down more than $40bn of assets in the past year.

Under the terms of the deal, Bank of America will pay about $29 for each Merrill share.

While that represents a 70% premium to the closing share price on Friday, Merrill’s share price stood at $50 in May and was above $90 at the start of 2007.

‘Great opportunity’

“Acquiring one of the premier wealth management, capital markets, and advisory companies is a great opportunity for our shareholders,” said Bank of America chairman and chief executive Ken Lewis said in a statement.

“Together, our companies are more valuable because of the synergies in our businesses.”

The deal will also see three Merrill Lynch directors join the board of Bank of America.

“Merrill Lynch is a great global franchise and I look forward to working with Ken Lewis and our senior management teams to create what will be the leading financial institution in the world with the combination of these two firms,” said John Thain, Merrill’s chairman and chief executive.

The deal – which is expected to be completed early next year – has been approved by directors of both companies, but now will need the approval of shareholders and regulators.

News reported by The BBC

The fourth-largest investment bank in the US, Lehman Brothers, has said it will file for bankruptcy protection, amid a growing global financial crisis.

Lehman had incurred losses of billions of dollars in the US mortgage market.

The move threatens to deal a further blow to the global financial system, as banks unwind their deals with Lehman.

Merrill Lynch, also stung by the credit crunch, has agreed to be taken over by Bank of America in a dramatic weekend of events for Wall Street.

Stock markets in Europe and Asia dropped sharply and the dollar tumbled against the euro and the yen as Lehman’s failure raised fears about the strength of the global financial system.

“The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence” Robert Peston, BBC business editor

The FTSE 100 index of leading UK shares was down 160 points, almost 3%, at 5256.50 in early exchanges.

Wall Street is also expected to open lower in what is likely to be a tense day of trading.

The Bank of England and the European Central Bank said they were monitoring money markets and stood ready to intervene if necessary.

Talks collapse

The chance that Lehman Brothers could collapse increased sharply after the strongest potential buyers pulled out at the weekend.

Barclays and Bank of America had been in talks to rescue the bank but negotiations faltered when it became clear that the US Treasury was strongly opposed to using government money to help clinch a deal.

Greg Wood, the BBC’s North America business correspondent, said that police had cordoned off the bank’s headquarters in New York and staff were leaving with cardboard boxes as onlookers gathered to watch the bank’s demise.

“I think the whole history – 150 years of effort and hard work – that’s the most saddening part for me,” said one Lehman employee as she left the building.

The bank, which employs about 25,000 staff worldwide, including 5,000 in the UK, was founded in 1850 by three brothers.

‘Extraordinary 24 hours’

Lehman Brothers said it intended to file for Chapter 11 bankruptcy protection, which allows a company time to reorganise and devise a plan to pay creditors over time.

It said that its broker-dealer division and asset management division Neuberger Berman Holdings would not be included in the filing.

The accounting firm PriceWaterhouseCoopers said the UK operations of Lehman Brothers have been placed under administration, and the business would be wound down in an orderly fashion.

Bank of America said it had agreed to buy investment bank Merrill Lynch for $50bn (£28bn), in a deal that will create the world’s largest financial services company.

Three of the top five US investment banks have now fallen victim to the credit crunch. Lehman and Merrill join Bear Stearns, which was sold to JP Morgan for a knockdown price in March.

The BBC’s business editor, Robert Peston, said that it had been Wall Street’s most extraordinary 24 hours since the late 1920s.

He said that Merrill’s sale was almost as shocking as Lehman’s demise.

“The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence,” he said.

Insurer in trouble

In addition to Lehman and Merrill Lynch, problems at AIG, once the world’s largest insurer, are also mounting.

Reeling from losses on its exposure to real estate, AIG has sought $40bn from the Federal Reserve to shore up its finances, the New York Times has reported.

To help prevent panic on financial markets, the Federal Reserve said for the first time it will accept stocks owned by banks as collateral for short-term cash loans, broadening its emergency lending programme.

Also 10 of the world’s biggest banks on Sunday agreed to establish a $70bn emergency fund, with any one of the banks able to able to tap up to a third of it should they face any liquidity problems.

News reported by The BBC

Merrill Lynch, Goldman Sachs and Deutsche Bank are the latest banks to reach a settlement with US regulators over the sale of risky securities.

The banks have agreed to buy back billions of dollars in auction-rate securities and pay fines, after allegations that they misled investors.

Of the three firms Merrill Lynch is to pay the highest fine of $125m (£66m).

Other banks that have reached similar settlements with regulators include Morgan Stanley and JP Morgan Chase.

New York Attorney General Andrew Cuomo has been leading the probe, with the support of federal and state regulators.

The banks have been accused of marketing the financial products, called auction-rate securities, as much safer than they were.

Investors were told that auction-rate securities would return more than money market investments and be easy to sell.

FINES PAID SO FAR
UBS: $150m
Merrill Lynch: $125m
Citigroup: $100m
Morgan Stanley: $35m
JP Morgan: $25m
Goldman Sachs: $22.5m
Deutsche Bank: $15m

Under the latest deal with Mr Cuomo, Merrill Lynch said it would repurchase up to $12bn in auction rate securities as well as pay the $125m fine.

Deutsche Bank meanwhile has a $15m fine to pay and must buy back some $1bn of the investments.

Goldman Sachs has a $22.5m fine and has agreed to buy back $1.5bn in securities.

Earlier this year, Citigroup and Swiss banking giant UBS reached a settlement to buy back $26bn of the securities.

Following the latest settlement Mr Cuomo said: “This has been a great day of progress,” adding that a number of banks were still being investigated.

News reported by The BBC

Merrill Lynch wrote off another $9.4bn from the value of its holdings in US mortgages and derivatives last night, taking its total writedowns since the credit crisis began to more than $40bn.

The investment banking giant, one of the biggest issuers of mortgage derivatives during the US housing boom, is scrambling to sell assets to make up for the losses in its trading operations.

It confirmed it would sell its 20 per cent stake in Bloomberg, the financial information giant, for $4.4bn and said it is also close to selling its controlling interest in Financial Data Services, a business administration division, for a further $3.5bn.

The assets sales did little to impress Wall Street, which focused on the larger than expected writedowns and sent Merrill shares swinging wildly in after-hours trading.

John Thain, its chief executive, said the losses had been exacerbated by the problems at the monoline insurance companies Ambac and MBIA, which Merrill has relied on to hedge its exposure to the mortgage market. “Our core franchise continues to perform well despite the extremely challenging market environment,” he said.

The larger-than-expected loss, announced after trading on Wall Street had ended for the day, took the shine off the earlier rally in financial stocks and darkened expectations for results from Citi-group this morning.

Earlier yesterday, JP Morgan Chase said its second-quarter profits fell by more than half because of $1.1bn (£550m) of investment banking writedowns, but the results beat expectations.

The writedowns, mainly for mortgages and leveraged buyout loans, helped drive net income down 53 per cent to $2bn from $4.2bn a year earlier. Write-downs, losses and bad-debt provisions at JPMorgan since the start of last year total more than $10bn but the hit has been far smaller than those taken by rivals such as Citi and Merrill, which were more exposed to credit markets at the heart of the financial crisis.

JPMorgan said it was taking market share from rivals, helping to boost investment banking income and retail financial services.

But Jamie Dimon, its chief executive, warned that the financial turmoil was far from over. “Our expectation is for the economic environment to continue to be weak – and to likely get weaker – and for the capital markets to remain under stress,” he said.

News reported by The Independent

NEW YORK (Reuters) – If investors thought Morgan Stanley had turned things around in asset management, a jarring second-quarter loss revealed the investment bank still has a ways to go.

Yet the unit, which has posted two straight quarterly pretax losses totaling $388 million (170 million pounds), has not been able to stop funds flowing from Morgan Stanley and Van Kampen mutual funds. Morgan Stanley co-President James Gorman has vowed to increase the focus on this problem.

“We’re going to turn the Bunsen burner up several degrees,” Gorman, credited with reviving the brokerage arms of Merrill Lynch and Morgan Stanley, said at a recent conference.

Managing mutual funds, hedge funds and real estate investments is a lucrative business on Wall Street, one that can deliver steady returns over time. Yet it’s been a largely untapped opportunity at Morgan Stanley, which had a laggard funds business until John Mack took over as chief executive three years ago.

The firm saw asset growth flat-line after the tech stock bubble burst in 2000. Meanwhile, regulators put a stop to Wall Street brokers promoting in-house funds to clients. Suddenly, funds forced to compete on performance saw customers flee.

Since then, Morgan Stanley (MS.N: Quote, Profile, Research) has stemmed outflows, offered new products and bought stakes in some fast-growing hedge funds. During the second quarter, a net $15.5 billion flowed into the division, the seventh straight quarter of in-flows.

However the retail mutual fund business has continued to struggle. During the latest quarter, about $600 million left Morgan Stanley-branded funds while $2.1 billion flowed out of Van Kampen funds.

“They have made some progress, but they haven’t quite turned things around on the fund flow front,” said Karen Dolan, head of funds analysis at Morningstar.

HEAT IS ON

One man feeling the heat is Stuart Bohart, who in February was named one of three co-heads of investment management and charged with fixing the $550 billion core fund business.

Bohart, a prime brokerage star at Goldman Sachs and Morgan Stanley, told Reuters the bank is making progress boosting returns, defining its fund brands and expanding offerings across asset classes and investment strategy.

“What we were doing in the past wasn’t good enough. We intend to be a much better firm, with much better performance and serve more clients,” Bohart said in an interview. “That requires a willingness to change, to get the right people in and the wrong people out. We’re very serious about it.”

Among other efforts, the bank wants to better define its two retail fund families. The Morgan Stanley brand, better known among institutions and overseas, will offer “edgier” investment strategies, such as long-short and commodity funds.

The $138 billion Van Kampen family, sold through brokers, offers more traditional equity and fixed-income funds.

Yet fund analysts say the mutual fund business is still flawed, hurt by manager turnover and poor performance.

“They have an identity crisis. What is Morgan Stanley, what is Van Kampen and how are we going to position these funds?” Morningstar’s Dolan said. “It seems they are more focused on sales than performance.”

Meanwhile, the division is suffering from decisions made before credit markets locked up. Losses on structured investment vehicles (SIVs) held in the firm’s money market funds, as well as its purchase of Crescent Real Estate last August, fueled a second-quarter loss.

“They made a strategic decision to place money in these SIVs as a reach for yield,” said Portales Partners analyst Charles Peabody, who notes the bank had $3.6 billion of exposure to the illiquid instruments. “This is not the end.”

MORE DEALS AHEAD

Other moves worked out. Stakes in U.K. hedge fund firm Lansdowne Partners and distressed investor Avenue Capital Group and the takeover of FrontPoint Partners helped jump start Morgan’s hedge fund business. Assets at the three firms nearly doubled in 18 months, growing by $20 billion in total.

Bohart said the firm would continue looking for hedge fund stakes and “bolt-on deals,” hiring management teams and developing new funds.

“We continue to look for partnerships where there are unique products we can’t create ourselves,” he said.

The bank also wants to bulk up existing businesses. Bohart says Morgan’s money market funds, currently $125 billion, and fixed-income funds, which manage about $100 billion, are too small.

As to the bigger question of performance, Bohart said in-flows and margins are improving, excluding SIV and real estate losses. Yet he cautioned that the weak returns of prior years cannot be offset overnight.

“In 2007 we made all this money and people said, ‘Gee, it’s fixed,’ but you don’t fix a business in a year,” Bohart said. “We’re not out of the woods yet, but I know they end at some point.”

News reported by Reuters