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Wall Street panics; markets lose $1 trillion

Dow plunges 778 points

By Patrice Hill (Contact) | Tuesday, September 30, 2008

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Wall Street snapped back Tuesday after its biggest sell-off in years amid growing expectations that lawmakers will salvage a $700 billion rescue plan for the financial sector. But the seized-up credit markets where businesses turn to raise money showed no sign of relief.

The rise in stocks wasn't unexpected as carnage on Wall Street often attracts bargain hunters, though questions remain about how investors will proceed.

Investors stung by Congress' inaction and a fresh crop of U.S. and European bank failures panicked Monday, triggering the worst point loss in Wall Street's history and slashing more than $1 trillion in market value in just a few short hours.

Convulsing an already turbulent market, the Dow Jones Industrial Average on Monday plummeted nearly 500 points within minutes after the congressional vote, to post a 778-point loss, its largest ever. Other major U.S. stock indexes dropped as much as 9 percent while one gauge of the broader market, the Wilshire 5,000 Composite Index, lost an unprecedented $1 trillion. The market's breathtaking moves left stocks at the lowest levels in four years.

As President Bush invoked powers granted during the Great Depression to soothe stressed credit markets, investors braced for a key deadline for rolling over debts on Tuesday, liquidating stock holdings, oil investments and other holdings to raise cash. Many piled into safe havens such as gold and Treasury securities, sending the yields on three-month T-bills as low as 0.32 percent — nearly zero. Oil prices fell a stunning $10.52 to $96.36.

"The market has spoken. Stocks caved in," and investors rushed to safety, said David Ader, bond strategist with RBS Greenwich Capital, one of many on Wall Street who hopes Congress will reconsider and vote for at least a watered-down version of the bailout later this week.

"This is not a one-off wonder, but the trajectory if the bill truly fails," he said of Monday's market rout. "The bill is truly needed for the system, economy, the country, the world. Perhaps wiser heads in Congress can make the point, assuming that new lows in stocks cannot."

Treasury Secretary Henry M. Paulson Jr. vowed to try to get "something that works" through Congress later this week, and in the meantime "use all the tools available" to help faltering banks and calm markets. The Treasury and Federal Reserve will continue to rescue or close down failing banks individually, but have dwindling resources to do so.

"We have experienced significant turmoil in our financial markets in the last few days, including the collapse of Washington Mutual and Wachovia here and the failure of two major financial institutions in Europe," Mr. Paulson said after meeting at the White House with Mr. Bush and Federal Reserve Chairman Ben S. Bernanke to weigh options in the wake of the House vote.

"Markets around the world are under stress, and that reduces the availability of credit that businesses across America depend on to meet payroll and to purchase inventories," he said. He predicted that consumers will soon have more trouble getting student and auto loans.