Dow Jones Sinks 514 Points While Dollar Reaches 2-Year High

Even with the aggressive steps the government has already taken, Treasury Secretary Henry Paulson indicated Wednesday that Americans would “have a number of difficult months ahead…in terms of the real economy.” This followed Wednesday’s Dow Jones Industrial Average’s dramatic drop of 514 points amid fears of a recession and concerns that government intervention won’t be enough to prevent global economies from faltering. Wednesday’s sell-off came after poor earnings from large companies in disparate sectors — Wachovia Corp., Boeing and Merck & Co. — exposed how wide the economic downturn has spread

Drops and Recoveries and Drops

Recent dramatic drops — two of them over 700 points each— were followed by almost immediate rebounds. If this doesn’t repeat itself, the Dow could slip closer to closing below the 8,000 mark, which hasn’t happened since March 31, 2003. Since stocks began tumbling on Sept. 15, the Dow has plunged as low as 8,451.19 on Oct. 10. On Wednesday, it closed at 8,519.21. Big rallies last Monday and Thursday were enough to send all the major indexes higher, giving Wall Street its best week since 2003. The Dow gained 4.75 percent for the week — a gain that was erased in Wednesday’s trading alone.
Stocks dropped across Asia and Europe, falling even harder in South America, where Brazil’s Bovespa index and Argentina’s Merval had losses near 10 percent. Argentina’s president announced plans to nationalize private pension funds to protect retirees from the financial crisis.

World Leaders to Meet Again

World leaders will gather in Washington on Nov. 15 to discuss the crisis. A senior US administration official said Wednesday that the forum will be the first in a series of international meetings to discuss what economists predict could be a long and deep downturn. But for many companies, the damage has already been done.

Meanwhile, members of Congress are moving forward with efforts to overhaul the regulatory system. The changes could be the most sweeping since the 1930s, when Congress revamped how the financial system was regulated in response to the 1929 stock market crash and a wave of bank failures.
Democrats in Congress are also pushing to assemble a second economic stimulus program that could total $150 billion or more. On Monday, Fed Chairman Ben Bernanke said a significant stimulus package is forthcoming. The White House has yet to endorse the idea, but has said President Bush was at least willing to consider a second stimulus measure.

Credit Markets Do Better

On a positive note, credit markets showed some signs of a thaw. Yields on Treasury bills and the interest rates banks charge each other have both fallen back to late-September levels. Bank-to-bank lending rates fell sharply overnight.

The London Interbank Offered Rate, or Libor, on three-month loans in dollars fell to 3.54 percent from 3.83 percent, dropping for an eighth straight day. Libor is significant because many mortgage and credit card rates are pegged to it and it’s a good barometer of banks’ willingness to lend. However, despite declining rates, the volume of loans remained weak.

On the currency scene, while shares in Asian markets fell to four-year lows, the flight from emerging market debt and stocks helped push the dollar to a two-year high against a basket of currencies with the dollar index up 0.2 percent to 85.6 after hitting a two-year peak above 86.

Add comment October 28th, 2008

$700 billion Bailout Bill Approved by Congress

The House of Representatives of the United States Congress approved the revised $700 billion Wall Street bailout on Friday by a 263-171 vote, putting into motion the biggest government intervention in the financial system since the Great Depression of 1929. The House’s vote followed the Senate’s approval on Wednesday.

Bush Signs Bill at Oval Office

The original bill, rejected four days before, sent the Dow Jones Industrial Average to an historic 777-point drop. President Bush quickly signed the bill at his desk at the Oval office and Treasury Department officials vowed to move swiftly to use the sweeping new powers to try to stabilize financial markets and ease deepening fears about the economy.

Before the House vote, members of Congress were deluged with calls and e-mails from constituents opposed to the rescue plan, but Monday’s brutal market plunge was met with public outrage and led to four days of heavy lobbying for the proposal. In order to ensure its passage, Senate leaders added tax breaks and other sweeteners to the measure and it was passed there on Wednesday. On Friday, the bill won 58 new “yes” votes in the House, thereby clinching its approval. Both presidential candidates, Democratic Sen. Barack Obama and Republican Sen. John McCain, participated in a broad-based effort to lobby lawmakers, joined by outside groups and local government officials across the country.
“We have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country,” Bush said.

Markets Decline Despite Bail-out

Despite the move, the markets declined on Friday, a reflection of broader economic uncertainty and worries about a government report indicting that unemployment rose sharply in September.

The 451-page Emergency Economic Stabilization Act grants the Treasury Secretary unprecedented authority to buy up to $700 billion of troubled assets from failing financial institutions in an effort to stave off more bankruptcies and provide cash for new loans to ease the credit market freeze-up. The bailout plan divided members of the same party, many admitting that they objected to the bill but simply had no choice but to vote for its approval.

Lawmakers demanded numerous changes to the Treasury Department’s 3-page proposal, including limits on how much executives may be paid if their firms sell assets to the government. Congress also raised the cap on Federal Deposit Insurance Corp account coverage from $100,000 to $250,000, required provisions to help homeowners avoid foreclosure and added an oversight board to supervise the program.

In fact, the financial industry will now faces greater congressional scrutiny in the months to come.  Previously obscure corners of the industry now subject to few rules governing complex derivatives and hedge funds, for example, could face federal supervision for the first time. At the same time, heavily regulated sectors, such as banking and insurance, are likely to face even greater oversight. Hearings to begin next week will focus on the causes and effects of the Lehman Brothers’ bankruptcy and the $85 billion bailout of the giant insurer, AIG, and
will examine the failures of current regulations.

After the Congressional session, lawmakers headed home to start their fall campaigns. Tougher regulations will have to wait till next year. Rep. Barney Frank, chairman of the House Financial Services Committee said lawmakers will have to “do some serious surgery on the financial structure.”

2 comments October 8th, 2008