Central banks mobilised worldwide today to reassure financial markets frightened by the bankruptcy filing of Lehman Brothers and sale of Merrill Lynch - Wall Street giants which many people once considered too big to fail.
Policymakers had their work cut out. Share prices sank, the dollar slid and demand soared for what short-term lending they offered. On the interbank market the cost of borrowing overnight dollars shot up nearly a full percentage point to its highest in nearly three months.
The response began with the US Federal Reserve, which said central banks, regulators and supervisors were in close contact on international scale and monitoring events as they unfolded.
It announced emergency measures for lending operations which effectively relax the terms on which banks can borrow from the central bank.
In Europe, the European Central Bank, as well as the German, French, British and Swiss authorities all responded in turn. The ECB held a money market operation where it allotted €30 billion in one-day liquidity to banks, only a third of the level demanded.
Economists Jacques Cailloux and Gareth Claase at Royal Bank of Scotland said this high level of demand, similar to that seen when the credit crunch first forced the ECB into emergency mode in August 2007, showed how fragile the situation was.
"The ECB will likely take note that the financial system remains starved of cash and that it might thus be forced to step in again," they said.
The Bank of England put an extra £5 billion into the financial system after receiving bids of nearly five times the amount of three-day funds available. The Swiss National Bank also provided extra liquidity to the money market.
The interbank cost of borrowing overnight dollars shot up today to its highest in nearly three months.
The bank-to-bank premium paid for overnight dollar funds was fixed at 3.10625 per cent, according to the British Bankers Association's latest daily fixing, up nearly a percentage point to hit its highest level since late June.
"Most banks are trying to do the obvious thing and horde liquidity," said David Keeble, head of fixed income strategy at Calyon in London.
In Asia, officials at Japan's central bank confirmed that the authorities were monitoring the situation closely, and the message was the same in Europe.
The dollar and stocks tumbled in Asia and Europe, and safe-haven debt soared after emergency weekend talks failed to save 158-year-old Lehman from becoming the latest victim of the credit crisis.
Wall Street's woes have prompted talk that the US Federal Open Market Committee may cut interest rates from 2 per cent when it meets this week. Fed fund futures jumped today to indicate an 80 per cent probability of a cut to 1.75 per cent tomorrow.
Lehman filed for bankruptcy protection after the weekend talks produced no alternative, but the gloomy news on Wall Street's health went even further than that.
Bank of America said it had agreed to buy Merrill Lynch in an all-stock deal worth $50 billion, looking a bargain as the world's largest retail brokerage sought refuge from fears that it could be the next victim of the credit crunch.