AIG Posts Record Loss, HSBC Issues Cash Call

The U.S. dollar spiked to a three-year high as investors first heard on Sunday about the AIG plans.

The U.S. government rescued insurance giant AIG <AIG.N> for the third time in five months, desperately seeking to save a world financial system so battered that Britain's HSBC <HSBA.L> hit shareholders with an $18 billion cash call.

The Dow Jones industrial average <.DJI> sank below 7,000 and hit a nearly 12-year low after American International Group on Monday reported the biggest quarterly loss in U.S. corporate history at $61.7 billion [nN02363433] and Europe's biggest bank, HSBC, said it would shut most of its U.S. consumer lending business. [nHKG49918]

Stock markets were saved from deeper losses by U.S. data showing consumer spending rose 0.6 percent in January, the largest increase since May, and U.S. factory activity contracted again in February, though at a slower rate. [nN02400884]

"A little better than expected but that's the difference between, 'Are you donating pints of blood or quarts of blood?'" said David Sowerby, a market strategist at Loomis Sayles in Detroit. "Just more in-your-face debilitating news on the economy. It's that simple."

Canada's economy shrank at an annualized rate of 3.4 percent in the fourth quarter, slightly better than expected but still more than at any time since 1991. [nN02254034]

The International Monetary Fund said it was likely to downgrade its global 2009 growth forecast into negative territory [nL2586304] and France was poised to cut its economic forecasts, conceding that GDP was likely to fall 1.5 percent this year rather than grow. [nL2212617]

The MSCI world equity index <.MIWD00000PUS> fell 4.3 percent to its lowest level in nearly six years.

The U.S. dollar spiked to a three-year high after investors heard on Sunday about the AIG plans and European currencies plunged on news European Union leaders rejected a comprehensive bailout for Eastern European countries. [nN02391990]

With Japan stuck in a deep recession, the yen inspired little confidence. Japanese government stimulus plans were seen as unlikely to prevent unemployment from rising to a post-war record. [nT183569]

AIG PUTS EUROPE AT RISK

The latest revision of the AIG bailout includes a $30 billion equity commitment from the U.S. government that AIG can draw on as needed. [nN01137189]

It was expected to put greater funds at AIG's disposal as it reported a $61.7 billion quarterly loss, or nearly half a million dollars per minute. [nL2370552]

Without U.S. government intervention, AIG's losses would prompt credit ratings downgrades, triggering even more debilitating losses for the insurer and its trading partners, analysts said. [nN01331741]

AIG guarantees about $300 billion of asset-backed securities and U.S. and European banks are counterparties on many of AIG's outstanding derivative contracts.

"European banks are about two-third of the problem ... it would be a domino effect across the globe. The ensuing panic would be disastrous," said Donn Vickrey, an analyst with Gradient Analytics.

HSBC's cash call, at a deep discount to Friday's closing share price, was Britain's biggest rights issue, tapping shareholders for $18 billion to fix a balance sheet hurt by the global financial crisis.

Annual profit fell by more than half as it absorbed the impact of soaring U.S. bad debts. HSBC said it was closing most of its U.S. consumer finance business as it closes out its $14.8 billion purchase of Household six years ago by writing off most of the value of the sub-prime business.

"With the benefit of hindsight, this is an acquisition we wish we had not undertaken," HSBC Chairman Stephen Green said. [nL2256770]

Euro zone manufacturers had their worst month in at least 12 years in February, and outside the 16-nation bloc British manufacturers cut jobs and output at a record pace as export orders dried up.