- The Washington Times - Tuesday, September 30, 2008

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.

The losses on Wall Street spread to Asia Tuesday, with stocks across the region plunging.

Japan’s benchmark Nikkei 225 index shed more than 544 points, or 4.6 percent, to 11,199.07 after losing 1.3 percent Monday, the Associated Press reported. At one point, the benchmark fell to as low as 11,160.83, the weakest in more than three years, Agence France-Presse reported.

Key indexes in Australia and New Zealand were both down about 4 percent, while Seoul’s Kospi lost 3.5 percent, and Hong Kong’s Hang Seng index declined 5.5 percent, the AP reported.

Taiwanese share prices opened down 6.16 percent Tuesday, Agence France-Presse reported. The weighted index was off 365.04 points at 5,564.59 in early trading. China’s financial markets were closed Tuesday during a weeklong national holiday.

Using Great Depression authority, Mr. Bush Monday dedicated some of the Treasury’s $72 billion exchange stabilization fund to temporarily guarantee money-market funds that have been seeing a run of withdrawals since Lehman Brothers’ bankruptcy two weeks ago.

The Treasury, the Fed and other regulators will continue to aid failing banks on a case-by-case basis using a combination of loans, arranged takeovers, and the liquidation authorities of the Federal Deposit Insurance Corp., as they did in the case of Wachovia Corp. on Monday.

The FDIC announced that it was facilitating the takeover of Wachovia by Citigroup in a $2 billion deal in which the giant New York bank acquired Wachovia’s banking operations and took on $53 billion of its debt and up to $42 billion of its losses on a portfolio of $312 billion in loans.

The FDIC would cover any losses beyond that amount, while acquiring $12 billion in Citigroup stock and warrants. The FDIC claimed that the transaction would not result in any charges against its insurance fund or cost to taxpayers, while fully protecting depositors.

Many analysts expect more banks to fail or be taken over. The stocks of two leading candidates — National City and Fifth Third Bancorp — sank to levels between $1 and $3 a share in trading Monday on fears they may be the next in line.

Other major Wall Street firms moved to shore up their deteriorating finances Monday. Morgan Stanley agreed to sell a 21 percent stake to Japan’s Mitsubishi UFJ Financial Group for $9 billion and bankrupt Lehman Brothers Holdings Inc. agreed to sell its crown jewel — the Neuberger Berman asset management unit — for $2 billion.

“It just seems that there are only going to be two types of banks in existence now: the ones that survive and get market share, or the ones that get gobbled up and have to be euthanized,” said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel.

Even before Wall Street trading opened Monday, markets overseas were shaken as the governments of Belgium, the Netherlands and Luxembourg took partial control of struggling bank Fortis NV, while Britain seized control of mortgage lender Bradford & Bingley, and German lender Hypo Real Estate Holding got a credit line from the German government.

The bank failures prompted the Fed and European central banks to mount their biggest cash infusion to date, pumping up to $620 billion into stressed money markets where banks have been having difficulty getting overnight loans.

Despite that, stock markets in Europe fell more than 5 percent.

“Investors may have freaked out,” said Rob Cox, an analyst with Breakingviews.com. But he took solace in the hope that the administration will find other ways to rescue ailing banks like it did in the case of Wachovia as well as Washington Mutual and American International Group earlier this month.

This story is based in part on wire reports.