Tuesday, October 7, 2008

On Global Financial System Crisis...Beyond Wall Street and Main Street...Andres Agostini








Fed to start buying commercial paper

Ben Bernanke opened the door to further US interest rate cuts on a day that saw the Federal Reserve moving to bypass banks and lend directly to US companies in an unprecedented attempt to unfreeze the money markets - 18:47

Wall St down after Fed liquidity plan

Financials lead losses - 18:16

Russia lends banks $37bn to stem crisis

Move follows steep falls in Moscow markets - 12:50

RBS and HBOS plunge on funding fears

RBS denies it asked government for capital - 17:18

Sullivan blames ‘mark to market’ for AIG’s woes

Accounting rule had ‘unintended effect’ - 15:38

GM cuts production in Europe

Credit crisis takes toll on car demand - 18:07

AMD spins off plants in $8.4bn Abu Dhabi deal

New partnership to build $3.2bn manufacturing plant - 13:16

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Companies

World

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Video

Aline van Duyn

US Daily View: Fed to buy commercial paper

Aline van Duyn on the Fed’s unprecedented plan to buy unsecured debt in the commercial paper market

View from the Top: Mikhail Shamolin

The CEO of MTS says the credit crunch will soon be over and the crisis is presenting opportunities as well as dangers

Lessons from Turkey’s banking rescue

Kemal Dervis of the UNDP talks about what the IMF can do now to help the global economy


Spain announces emergency fund

Spain became the latest European nation to take unilateral measures to deal with the world’s deepening financial crisis, announcing a €30-50bn emergency fund to provide liquidity to the financial system by buying Spanish bank assets - Oct 7 2008

Fed to start buying commercial paper

Bernanke opens door to rate cut - Oct 7 2008

RBS and HBOS plunge on funding fears

RBS denies it asked government for capital - Oct 7 2008

Russia lends banks $37bn to stem crisis

Move follows steep falls in Moscow markets - Oct 7 2008

Markets routed in global sell-off

Dow falls below 10,000 - Oct 7 2008

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State to the rescue

As the global financial crisis deepens, governments have intervened to save ailing banks and in some cases have take over previously public companies. Our interactive graphic shows the value of government assistance in recent weeks

Banks Bail-out

Interactive feature: Are European banks too big to fail?

This interactive map explores the relative size of business and government. Update to shows tier 1 capital ratios for each bank, and household debt levels as percentage of GDP

Regulating short selling

Short sellers were blamed for contributing to a sharp fall in financial stocks in recent months. Our interactive graphic looks at how regulators around the world have recently targeted the practice

Comment

Conservatism overshoots its limit

Gideon Rachman

Ideas become fashionable and get pushed to their logical conclusion, as their backers succumb to “irrational exuberance”. Then comes the crash, writes Gideon Rachman - Oct-06

Tony Jackson: New panic is proof of big league crisis

Monday’s fresh outburst of panic on global markets was final proof that as financial crises go, we are now in the big league. Comparisons with the dotcom bubble or even the Asian crisis of 1997 are inadequate. We must think of 1987 or 1929, writes Tony Jackson - Oct-06

David Cameron: We will help give banks capital

Conservatives support government action when the foundations of the banking system are threatened, writes David Cameron - Oct-05

A global downturn in western power

Who are the likely political losers and winners – that is, those who lose the least – from the present financial mess, asks Dominique Moisi - Oct-05

Inadequate cover

Hank Greenberg

As a company that made pricing risk its speciality, AIG failed spectacularly to see trouble looming in the business it did with Wall Street banks - Oct-06

How an Asian bond could save us from the weak dollar

Asia’s reserves could be turned into Asia bonds that, without losing value, could stimulate trade and investment in Asia, writes Thaksin Shinawatra - Oct-06

It is time to abandon imprudent caution

Philip Stephens

Gordon Brown must take more risks. This crisis demands a politician ready to anticipate rather than respond to events, writes Philip Stephens - Oct-06

Europe: In it together

John Thornhill

Governments moved quickly to rescue failing banks but there are doubts in their ability to mount a co-ordinated response to a new phase in the crisis - Oct-03

Editorial Comment

Lex

    Markets and cannon - Oct-06

    European banks - Oct-06

    Thrust and Pari - Oct-06

    Corporate borrowing - Oct-06

More stories

Fed takes steps to bolster liquidity - Oct-06

FTSE 100 in biggest fall since Black Monday - Oct-06

Fed to hold CDS clearance talks - Oct-07

Iceland takes emergency action - Oct-07

Berlin shrugs off attacks on savings pledge - Oct-06

Tokyo hints at boost to stimulus package - Oct-06

Trading in Brazil suspended twice - Oct-06

Danish deposits backed in bank bail-out deal - Oct-06

EU resists plan for bail-out fund - Oct-06


Wall St down after Fed liquidity plan

By Alistair Gray in New York

Published: October 7 2008 14:03 | Last updated: October 7 2008 18:16

Wall Street stocks were lower on Tuesday as investors weighed Federal Reserve plans to create a commercial paper funding facility against the absence of rate cuts by world central banks.

General Electric and American Express – among the largest direct issuers of commercial paper, according to Bloomberg – were among the biggest winners from the Fed’s announcement. The pair rose 3.2 per cent at $22.07 and 3.7 per cent at $31.19, respectively.

The Fed’s intervention in the commercial paper market, which is widely used by large companies to raise short-term finance, is designed to boost much-needed liquidity.

Yet financials overall, down 4.3 per cent, led the market lower as money markets remained in paralysis.

Bank of America lost 15.6 per cent to $27.19 after the bank became the first Dow component to disclose quarterly results for the new reporting season. After the close of the previous session, the bank said it would raise $10bn in capital and halve its dividend.

Morgan Stanley and JPMorgan fell 12.6 per cent to $20.54 and 4.5 per cent to $42.03 respectively.

Merrill Lynch slid 13.6 per cent at $20.91 after Wachovia widened its third quarter loss estimate from $1.03 to $6.12 a share.

For much of on Tuesday morning, the Dow Jones Industrial Average teetered around the psychologically significant 10,000 barrier breached in the previous session after a four-day run of heavy losses.

By midday in New York, the Dow stood 1.2 per cent lower at 9,837.38 while the S&P 500 was 1.6 per cent down at 1,039.93. The Nasdaq Composite index fell 1.8 per cent to 1,828.52.

In technology, Google fell 1.4 per cent to $365.80 after Stifel Nicolaus cut its price target on the internet search group from $600 to $525.

IBM gave up 2.3 per cent to $98.31 after Barclays cut its recommendation on the stock from “overweight” to “equal-weight” due in part to its heavy exposure to the financial sector.

The energy, industrial and material sectors helped put a lid on the declines, up 1.3 per cent, 0.5 per cent and 0.8 per cent respectively.

Alcoa added 0.7 per cent to $18.24 ahead of its results due after the close. Analysts expect the aluminium producer, hit by lower prices, to report another quarterly profit decline.

An oil price recovery lifted energy stocks, such as Exxon Mobil and Chevron Corp, which rose 3 per cent at $79.67 and 1.1 per cent at $77.67, respectively.

First Solar fell 11.7 per cent to $141 and Sunpower fell 9.6 per cent to $50.03 after Goldman Sachs said solar power companies would be hurt as some governments cut subsidies for the technology. Goldman removed First Solar from its “conviction buy” list and cut its recommendation on both stocks to “sell”.

Yet the oil price rise hurt shares in some airlines. UAL Corp the parent company of United Airlines lost 14.3 per cent at $5.74 and Continental 12.8 per cent at $11.73.

In automotives, Ford and General Motors lost 13 per cent at $3.21 and 5.3 per cent at $8.03 respectively after the pair both warned they would cut output in Europe.

Illinois Tool Works lost 3.2 per cent to $37.85 after the manufacturer lowered third quarter and full-year forecasts due in part to weakness in North American industrial production.

Meanwhile in retail, Safeway rose 5.8 per cent to $23.04 on the back of better-than-expected third quarter earnings.

In consumer discretionaries, Walt Disney eased 2.9 percent to $27.45 after Merrill Lynch downgraded the the world’s biggest theme-park operator from “neutral” to “underperform”

The Chicago Board Options Exchange Volatility index, known as Wall Street’s fear gauge, fell 7.9 per cent, although at 47.92 it continued to indicate signs of extreme distress.

Tobias Levkovich, an erstwhile bullish analyst at Citigroup, cut his year-end forecast on the S&P from 1,475 to 1,200 due to “the anxiety generated by collapsing international stock markets, weaker economies around the world.”

Fed funds futures on Tuesday showed a 100 per cent probability that the Fed would cut interest rates at its meeting later in the month, and a 50 per cent probability it would cut rates by three-quarters of a percentage point.

Russia lends banks $37bn to stem crisis

By Catherine Belton in Moscow

Published: October 7 2008 12:50 | Last updated: October 7 2008 12:50

Russia said on Tuesday it would pump $37bn in long-term subordinated loans into state-controlled banks in a new measure to fight off a deepening financial crisis that has seen the steepest losses ever on the Russian stock exchange.

Dmitry Medvedev, the Russian president, announced the measure to pump five-year loans via the two biggest state banks, VTB and Sberbank, after an emergency meeting with the heads of the biggest state banks to discuss what he called “a large scale financial crisis”.

Investors said the move would provide much needed longer term liquidity into the banking system and could revive money markets that have frozen in what one fund manager called a “vicious cycle of fear.”

Shares rose in Moscow and London, with the rouble-denominated RTS index up 2.9 per cent, but remained extremely volatile.

The emergency measure comes after the benchmark RTS posted its steepest loss in its 13-year history on Monday, plummeting 19.1 per cent, while the Micex fell 18.7 per cent.

The steep falls have sent stocks spinning to their lowest levels since 2004 and erased all the gains made since Russia unveiled a $100bn-plus rescue package on September 19 aimed at restoring investor confidence.

The state rescue funds so far have been mainly pumped in as short-term deposits in the biggest banks, but failed to break a growing crisis of confidence, exacerbated by the global financial turmoil and falling commodity prices. Banks had been hoarding the cash instead of lending it on, analysts said.

The liquidity crunch has provoked a wave of panic selling, exacerbated by fears that Russia’s richest oligarchs may be forced to dump stocks because they are unable to raise cash to meet margin calls as the value of collateral pledged for tens of billions of dollars in loans plummets.

Speculation that Oleg Deripaska, Russia’s richest man, could be forced to sell his 25 per cent stake in Norilsk Nickel, the world’s biggest nickel miner – which has been pledged as collateral for a $4.5bn loan – sent the London-traded stock down 44 per cent on Monday.

Mr Deripaska had last week been forced to divest his 20 per cent stake in Magna, the Canadian car parts maker, to creditors after a wave of margin calls. Mr Deripaska’s UC Rusal insisted in a statement on Tuesday that it would not sell the Norilsk stake.

Shares in Rosneft, the state-controlled oil major, lost 41 per cent on Monday on fears that the fall in value of its shares put it in breach of covenants on a $1.8bn loan. A person close to Rosneft on Tuesday denied this was the case.

Meanwhile Gazprom, the state-controlled gas giant, lost one quarter of its value on Monday.

“There is currently little rhyme or reason to trading in the Russian stock market,” Chris Weafer, chief strategist at Uralsib investment bank, wrote in a research note on Monday. “It is as if investors are aggregating the total sum of their fears concerning the global and domestic economies. Worst-case scenario, and then some.”

RBS and HBOS plunge on funding fears

By Michael Hunter

Published: October 7 2008 08:45 | Last updated: October 7 2008 17:18

Banks were once again under pressure in London on Tuesday amid worries about the health of the financial sector, but the broader market closed fractionally higher after a volatile session.

HBOS and Royal Bank of Scotland were the heaviest fallers – closing down 41.5 per cent to 94p and 39.2 per cent at 90p, respectively. The HBOS price represented a 50 per cent discount to the terms of the offer from Lloyds TSB. Shares in Lloyds closed down12.9 per cent at 225½p.

Sullivan blames ‘mark to market’ for AIG’s woes

By Stephanie Kirchgaessner in Washington

Published: October 7 2008 15:38 | Last updated: October 7 2008 15:38

Martin Sullivan, former chief executive of AIG, the insurance giant that was rescued by the US government, on Tuesday blamed a single accounting rule for the company’s travails.

In written testimony released before he was set to testify before Congress, Mr Sullivan said that “multiple actions by multiple parties” created the “unprecedented financial market disruption” that caused his firm’s near-collapse and eventual $85bn bail-out by the US Treasury.

GM cuts production in Europe

By John Reed in London and Bernard Simon in Toronto

Published: October 7 2008 18:07 | Last updated: October 7 2008 18:07

General Motors is cutting production at most of its 10 manufacturing plants in Europe in a stark sign of the growing toll the credit crisis is taking on demand in the real economy. GM said on Tuesday it was halting production or cutting shifts at the plants for between 10 days and three weeks in response to lower sales of its Opel, Vauxhall and Saab cars.

“The financial crisis is affecting the vehicle market,” Opel said.

AMD spins off plants in $8.4bn Abu Dhabi deal

By Chris Nuttall in San Francisco

Published: October 7 2008 07:47 | Last updated: October 7 2008 13:16

Advanced Micro Devices plans to spin off its chip plants and receive a lifeline of up to $8.43bn from Abu Dhabi as it struggles to compete with its larger microprocessor rival Intel.

AMD confirmed on Tuesday a long awaited ”asset-light” strategy that will relieve it of the burden of trying to maintain manufacturing parity with its Silicon Valley neighbour.

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Spanish PM to hold emergency talks with banks - Oct-06

BNP takes control of Fortis in €14.5bn deal - Oct-06

Germany guarantees savings - Oct-06

Fed pressed to step up crisis action - Oct-05

Darling plans ‘big steps’ to aid banks - Oct-06

Iceland in talks to prevent bank meltdown - Oct-05

Funds dry up in Golden State - Oct-05

Fall in markets as bail-out is approved - Oct-03

Banks braced for insurance crackdown - Oct-03

Citigroup moves to thwart Wells-Wachovia deal - Oct-04

California may seek $7bn emergency loan - Oct-04


Fed chief suggests more rate cuts may be needed to boost economy
Updated 25m ago | Comment | Recommend E-mail | Save | Print |
Bernanke
AP

NO CHANGE
WASHINGTON — Federal Reserve Chairman Ben Bernanke Tuesday suggested the central bank may have to cut interest rates to shore up a rapidly deteriorating economy and address a credit crisis of "historic dimensions."

In a speech for delivery to the National Association for Business Economics, Bernanke said that in light of a worsening economic picture, and somewhat better inflation readings "the Federal Reserve will need to consider whether the current stance of monetary policy remains appropriate."

"The Fed chairman just gave the green light for a rate cut at the October meeting, if not before," Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, said in a note to clients.

Bernanke also warned that the economic downturn could last some time, with businesses and consumers unable to get needed credit.

"All told, economic activity is likely to be subdued during the remainder of this year and into next year," Bernanke said. "The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth."

The central bank has held its target for a key interest rate steady at 2% since the spring. In recent months, Fed officials have been in a bind, caught between slowing growth and rapidly rising inflation. In the past several weeks, however, oil and other commodity prices have fallen dramatically, while unemployment has spiked, consumer spending has slowed, and the credit crisis has spread incessantly despite numerous Fed efforts to soothe the markets, including providing hundreds of billions of dollars of low-interest loans.

Bernanke noted that the economy had shown signs of weakening even before the recent increase in financial market tensions. While he said that falling home prices and sales continued to be the primary problem in both the real economy and financial markets, he noted that "the slowdown in economic activity has spread outside the housing sector."

Rising joblessness and sluggish wages have forced consumer spending, more than two-thirds of economic activity, to "contract significantly" since May, Bernanke said. Business investment spending is under pressure.

"Even households with good credit histories are now facing difficultuies in obtaining mortgatge loans or home equity lines of credit. Banks are also reducing credit card limits, and denial rates on automobile loan applciations reportedley are rising," he said.

Bernanke said that slower economic growth and the recent decline in commodity prices should lead to an inflation rate closer to the level desired by the Fed. Still he cautioned that the outlook remained "highly uncertain" due to the extraordinary volatility of commodity prices, and promised to monitor the situation closely.

The Fed chairman said the $700 billion financial rescue package signed into law last week should, over time, stabilize markets and help banks and other lenders raise needed capital.

"These are momentous steps, but they are being taken to address a problem of historic dimensions," Bernanke said. "The Congress and the administration chose to act at a momenet of great stress, but one at which the great majority of financial institutions have sufficient capital and liquidity to return to their critical function of providing new credit for our economy."

A growing number of economists, including those at Global Insight, UBS and First Trust Advisors, have been predicting the Fed will need to cut its target for short-term interest rates this month. The Fed next meets Oct. 28 and 29, but can change rates at any time.

Investors in a market in which participants bet on future Fed moves Tuesday morning were pricing in a half-percentage point cut, according to Action Economics.

But even some economists who are expecting a rate cut question how much it will do, given that banks are spooked to the point that they are unwilling to lend, no matter what the price is.

"It probably is something that they should do, but I wouldn't expect it to be terribly effective," says Martin Baily, an economist at the Brookings Institution who says it still could provide a psychological boost. "What we're trying to do is deal with market psychology right now."

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Business

Fed Announces Plan to Buy Short-Term Debt

Published: October 7, 2008

WASHINGTON — The Federal Reserve announced a radical new plan on Tuesday to jump-start the engine of the financial system.

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Fred R. Conrad/The New York Times

By the end of trading Monday at the New York Stock Exchange, stocks had tumbled 3 percent.

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Fears of Banking Instability and Global RecessionGraphic

Fears of Banking Instability and Global Recession

Back Story with The Times's Vikas Bajaj (mp3)

The Fed said in a statement that it would begin to buy large amounts of short-term debt in an effort to stimulate the credit markets, which have all but dried up.

Under the program, the Fed said that it would buy the unsecured short-term debt that companies rely on to finance their day-to-day activities. “This facility should encourage investors to once again engage in term lending in the commercial paper market,” the Fed said Tuesday in a statement. “An improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households.”

While the move will put more taxpayer dollars at risk, it underscores the growing sense of urgency felt by policy makers in a climate where lending has stalled. The Commercial Paper Funding Facility, “will complement the Federal Reserve’s existing credit facilities to help provide liquidity to term funding markets,” the Fed statement said.

The Fed said it was creating a new entity to buy three-month unsecured and asset-backed commercial paper directly from eligible companies. It hopes to have the program running soon.

Also on Tuesday, European Union finance ministers gathered in Luxembourg to seek common ground to buttress the continent’s banking system in the face of the financial crisis. Despite proposals from France and Italy, the European Union has eschewed any common fiscal approach to the crisis, mainly because Germany refuses to be drawn into a scheme for fear of being burdened with the costs of rescuing non-German banks.

The finance ministers more than doubled the minimum level of guarantees for bank deposits in member countries, to 50,000 euros ($68,000), on Tuesday as they battled to shield the Continent’s banks from turmoil and build a measure of confidence in its battered financial system.

The Fed’s plan to buy commercial paper was formulated amid cascading losses in global stock markets, as the banking crisis spread across Europe and investors feared dire consequences for the world economy. The Dow Jones industrial average fell as much as 800 points before a late recovery, finishing down 369.88, below 10,000 points for the first time since 2004.

Even before bankers on Wall Street reached their desks on Monday, European stocks were plunging. The Russian stock market dropped 19.1 percent, the biggest decline since the fall of the Soviet Union. Major indexes in London and Frankfurt lost more than 7 percent; stocks in Paris fell by 9 percent. Stocks in Latin America and other emerging economies took their worst collective tumble in a decade.

Volatility reached the highest level in two decades, and oil prices fell below $90 for the first time since February.

The contagion moved to Asian with the Nikkei index of Japanese stocks closing down 3 percent and the Hang Seng index of stocks in Hong Kong fell 4.9 percent. But shares rebounded Tuesday morning in Europe, with the FTSE up 1.2 percent in London, the CAC 40 was up 1.7 percent in Paris and the DAX in Frankfurt was slightly higher.

Investors around the world are worried about what the evaporation of credit will do to an already-weakened global economy.

“There is a growing recognition that not only has the credit crunch refused to be contained, it continues to spread,” said Ed Yardeni, an investment strategist. “It’s gone truly global.”

In the United States, consumers appear to be significantly curbing spending; last month, employers cut more jobs than any month in five years. The $6 decline in oil prices, which settled at $87.81 a barrel, stemmed in part from fears that demand will slacken in the face of a deteriorating economy.

The Fed plan is intended to renew the flow of credit on which the economy depends. Under its plan, the central bank would buy unsecured commercial paper, essentially short-term i.o.u.’s issued by banks, businesses and municipalities.

The market for that kind of debt has all but shut down in the last week, with many major corporations unable to borrow for longer than a day at a time, as banks become more fearful of giving out cash. The volume of such debt totaled about $1.6 trillion as of Oct. 1, down 11 percent from three weeks earlier.

These credit fears persisted over the weekend despite the $700 billion bailout package that Congress approved last week.

Mr. Andrews reported from Washington and Mr. Grynbaum from New York. Vikas Bajaj contributed reporting.



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Bernanke: Economic outlook weaker

Fed chairman says financial crisis will dampen economy well into 2009 and hints at future rate cuts; says recent actions by Fed, Treasury should help economy recover.

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What is your current investment strategy?
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NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke predicted that the global financial markets crisis is likely to restrain the economy well into next year and signaled that the Fed may be getting ready to cut interest rates.

But he said he believes the unprecedented steps taken to have the Treasury Department and the Fed intervene in financial markets were done in time to prevent more expensive and permanent damage to the nation's leading financial institutions.

In a speech before the National Association of Business Economics in Washington on Tuesday, Bernanke said the threat of inflation has receded recently, while the economy has continued to weaken. This could be interpreted as a sign that the central bank might be preparing to lower its key fed funds rate soon.

"Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased," he said.

"In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate," he added.

The fed funds rate is the primary lever the central bank uses to influence the economy. Lower rates can help reduce the borrowing costs for businesses and consumers on a wide range of loans, including business lines of credit, credit card rates and home equity loans. These cheaper loans can increase economic activity.

But lower rates can also add to inflation pressures since they tend to reduce the value of the dollar and make imported goods, most notably oil, more expensive.

The Fed cut rates seven times between September 2007 and this April, but held them steady at 2% at its past three meetings due to inflation concerns.

The Fed's next scheduled meeting is Oct. 28-29. Some investors and economists have suggested the current financial crisis could lead the Fed to announce an emergency rate cut ahead of that meeting.

Bernanke again pointed to falling housing prices as a primary cause of the problems in the nation's financial sector. But he warned "the slowdown in economic activity has spread outside the housing sector."

And he added that tighter credit conditions mean that the economic weakness is likely to continue into 2009.

"The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance," he said.

Bernanke defended the $700 billion bailout package passed by Congress and signed into law last week. The rescue plan will allow Treasury to buy damaged mortgage-backed securities from financial firms.

Bernanke said the bailout, as well as moves by the Fed this week to inject hundreds of billions more into the banking system and buy commercial paper used by many businesses to finance their day-to-day operations, were necessary actions to take at this time of economic stress.

"These are momentous steps, but they are being taken to address a problem of historic dimensions," he said.

And he predicted that the efforts would be successful in returning the economy into a growth path.

"The steps being taken now to restore confidence in our institutions and markets will go far to resolving the current dislocations in the markets," he predicted. "I believe that the bold actions taken...together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery." To top of page

Markets Last Change
Dow Jones 9,597.88 -357.62 / -3.59%
Nasdaq 1,783.20 -79.76 / -4.28%
S&P 500 1,013.99 -42.90 / -4.06%
10-year Bond 104 11/32 Yield: 3.47%
U.S.Dollar 1 euro = $1.360 0.011
October 7, 2008 2:14 PM ET
CompanyPrice% Change
Morgan Stanley 15.70 -33.19%
Yrc Worldwide Inc 5.00 -29.28%
Ual Corp 5.06 -24.48%
Merrill Lynch & Co., Inc 18.52 -23.47%
Oct 7 2:06pm ET †
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Exhausted markets slide again

Dow drops as much as 279 points as Fed credit plan fails to reassure investors. Bernanke comments add more worries.

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By Alexandra Twin, CNNMoney.com senior writer

What is your current investment strategy?
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NEW YORK (CNNMoney.com) -- Stock declines accelerated Tuesday afternoon as investor enthusiasm about the Fed's plan to unfreeze credit markets faded and Chairman Bernanke sounded the alarm on the economy.

With 2-1/2 hours left in the session, the Dow Jones industrial average (INDU) had lost 225 points or 2.3%. The blue-chip average ended below 10,000 Monday for the first time in almost 4 years.

The Standard & Poor's 500 (SPX) index fell 2.6% and the Nasdaq composite (COMP) lost 2.8%. Both ended at multi-year lows Monday.

Credit markets remained stressed, but showed some improvement after the Fed move. Treasury prices tumbled, pushing the corresponding yields higher as investors shifted to stocks.

Stocks plunged 369.88 points on Monday, with the Dow losing as much as 800 points during the session, as the $700 billion bank bailout plan and European government attempts to prop up faltering banks failed to comfort panicky investors.

Stocks initially rose Tuesday on the Fed's latest plan, but gave up those gains by midmorning, turning lower.

"It's another step in the right direction, but it's hard to get too excited about this because nothing yet has worked," said Bill Stone, chief investment strategist at PNC Financial Services Group.

"Eventually, if they [the government] stack up enough things, something will work," he said.

He said that it's positive that the Fed and the Treasury are taking aggressive and creative approaches to handling the current crisis. However, people are exhausted after all that's happened and they are less willing to cheer a plan that won't kick in for some time.

Central bank Chairman Ben Bernanke, speaking in the afternoon, said that the economic outlook has worsened and the financial crisis will hurt the economy well into next year. He also implied that more interest-rate cuts are on the way. (Full story).

Stock declines accelerated following his comments.

Fed plan: The Federal Reserve said Tuesday it will buy commercial paper, short-term debt that companies use to finance daily operations, from individual companies. Panicky investors have been less willing to buy this kind of debt lately, making it hard for companies to get the money they need to operate.

The Fed move is aimed at creating a market for this kind of debt, ultimately loosening up the frozen credit markets. (Full story)

Businesses depend on the credit markets to function on a daily basis, and the absence of ready capital has stalled the broader financial system and hurts consumers.

The government has taken a number of dramatic steps of late to try to get the markets functioning properly again amid the housing collapse and subsequent credit crunch.

On Monday, the Fed made an additional $300 billion available to banks in return for a range of damaged assets, on top of another $300 billion already available. The Fed could expand that to $900 billion by the end of the year.

And on Friday, President Bush signed into law the $700 billion bank bailout, which involves the Treasury buying bad debt directly from banks in order to get them to start lending to each other again.

Company news: After the close Monday, Bank of America (BAC, Fortune 500) reported a steep drop in profit that was short of estimates and cut its dividend. The bank also said it will raise $10 billion through a stock sale and that the company will need to set aside money for bad loans through the coming year. Shares fell 18% Tuesday. (Full story)

Also late Monday, Wells Fargo (WFC, Fortune 500) and Citigroup (C, Fortune 500) both agreed to a legal standstill in their battle for Wachovia (WB, Fortune 500). (Full story)

AIG (AIG, Fortune 500) was in the spotlight Tuesday, in the second of several House hearings into what led to the current crisis. The government had to bail out the insurance giant with an $85 billion credit line last month to keep it from imploding.

On Monday, the House Oversight Committee questioned Richard Fuld, chief executive of Lehman Brothers, which went bankrupt last month.

A variety of bank stocks fell Tuesday, including Citigroup (C, Fortune 500), JP Morgan Chase (JPM, Fortune 500), Goldman Sachs (GS, Fortune 500), Merrill Lynch (MER, Fortune 500) and Morgan Stanley (MS, Fortune 500).

But the declines were broad, with 28 of 30 Dow components sliding. Besides the financials, other losers included Walt Disney (DIS, Fortune 500), GM (GM, Fortune 500), Pfizer (PFE, Fortune 500), Home Depot (HD, Fortune 500) and Wal-Mart Stores (WMT, Fortune 500), all of which lost between 4% and 5%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners three to one on volume of 800 million shares. On the Nasdaq, decliners topped advancers by two to one as 1.5 billion shares changed hands.

Global markets: Markets overseas were mixed Tuesday, a day after taking a drubbing everywhere.

Australian markets rallied after the government cut short-term interest rates by a full percentage point, surprising investors. Asian markets ended lower.

European markets were mixed. Russian markets opened late, but managed gains after having been shut down Monday following a steep selloff. (Full story)

(Europe: The new Wall Street?)

Credit markets: Measures of bank nervousness remained at elevated levels Tuesday, but showed some improvement.

The difference between the 3-month Libor and the Overnight Index Swaps fell to 2.93% from a record high of 2.97% earlier in the day. The Libor-OIS spread measures how much cash is available for lending between banks and is used by banks to determine rates. The bigger the spread, the less cash is available.

But 3-month Libor, the rate banks charge each other to borrow for three months, rose to 4.32% from 4.29% Monday.

The TED spread, which is the difference between 3-month Libor and what the Treasury pays for a 3-month loan, fell to 3.35% after hitting an all-time high of 3.95% Monday.

The wider the spread, the more reluctant banks are to lend to each other rather than from the federal government. When markets are fairly calm, banks charge each other premiums that are not much higher than the U.S. government.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose to 0.97% from 0.44% late Monday, with investors looking for a slightly better return on their money. Last month, the 3-month bill skidded to a 68-year low around 0% as panicked investors fled stocks.

Treasury prices dipped, propelling the yields. The benchmark 10-year note fell 6/32, lifting the corresponding yield to 3.47% from 3.45% Monday. Treasury prices and yields move in opposite directions.

Oil and gold: U.S. light crude oil for November delivery rallied $1.39 to $89.20 a barrel on the New York Mercantile Exchange, after ending the previous session at an eight-month low.

COMEX gold for December delivery rallied $14.60 to $880.80 an ounce.

Other markets: In currency trading, the dollar slipped against the euro after hitting a 14-month high against the European currency on Monday. The dollar also slipped against the yen, giving up earlier gains. (Full story)

The price of gas decreased for the 20th consecutive day, according to a survey of credit card activity.

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Markets Last Change
Dow Jones 9,597.88 -357.62 / -3.59%
Nasdaq 1,783.20 -79.76 / -4.28%
S&P 500 1,013.99 -42.90 / -4.06%
10-year Bond 104 11/32 Yield: 3.47%
U.S.Dollar 1 euro = $1.360 0.011
October 7, 2008 2:14 PM ET
CompanyPrice% Change
Morgan Stanley 15.70 -33.19%
Yrc Worldwide Inc 5.00 -29.28%
Ual Corp 5.06 -24.48%
Merrill Lynch & Co., Inc 18.52 -23.47%
Oct 7 2:06pm ET †
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Exhausted markets slide again

Dow drops as much as 279 points as Fed credit plan fails to reassure investors. Bernanke comments add more worries.

By Alexandra Twin, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Stock declines accelerated Tuesday afternoon as investor enthusiasm about the Fed's plan to unfreeze credit markets faded and Chairman Bernanke sounded the alarm on the economy.

With 2-1/2 hours left in the session, the Dow Jones industrial average (INDU) had lost 225 points or 2.3%. The blue-chip average ended below 10,000 Monday for the first time in almost 4 years.

The Standard & Poor's 500 (SPX) index fell 2.6% and the Nasdaq composite (COMP) lost 2.8%. Both ended at multi-year lows Monday.

Credit markets remained stressed, but showed some improvement after the Fed move. Treasury prices tumbled, pushing the corresponding yields higher as investors shifted to stocks.

Stocks plunged 369.88 points on Monday, with the Dow losing as much as 800 points during the session, as the $700 billion bank bailout plan and European government attempts to prop up faltering banks failed to comfort panicky investors.

Stocks initially rose Tuesday on the Fed's latest plan, but gave up those gains by midmorning, turning lower.

"It's another step in the right direction, but it's hard to get too excited about this because nothing yet has worked," said Bill Stone, chief investment strategist at PNC Financial Services Group.

"Eventually, if they [the government] stack up enough things, something will work," he said.

He said that it's positive that the Fed and the Treasury are taking aggressive and creative approaches to handling the current crisis. However, people are exhausted after all that's happened and they are less willing to cheer a plan that won't kick in for some time.

Central bank Chairman Ben Bernanke, speaking in the afternoon, said that the economic outlook has worsened and the financial crisis will hurt the economy well into next year. He also implied that more interest-rate cuts are on the way. (Full story).

Stock declines accelerated following his comments.

Fed plan: The Federal Reserve said Tuesday it will buy commercial paper, short-term debt that companies use to finance daily operations, from individual companies. Panicky investors have been less willing to buy this kind of debt lately, making it hard for companies to get the money they need to operate.

The Fed move is aimed at creating a market for this kind of debt, ultimately loosening up the frozen credit markets. (Full story)

Businesses depend on the credit markets to function on a daily basis, and the absence of ready capital has stalled the broader financial system and hurts consumers.

The government has taken a number of dramatic steps of late to try to get the markets functioning properly again amid the housing collapse and subsequent credit crunch.

On Monday, the Fed made an additional $300 billion available to banks in return for a range of damaged assets, on top of another $300 billion already available. The Fed could expand that to $900 billion by the end of the year.

And on Friday, President Bush signed into law the $700 billion bank bailout, which involves the Treasury buying bad debt directly from banks in order to get them to start lending to each other again.

Company news: After the close Monday, Bank of America (BAC, Fortune 500) reported a steep drop in profit that was short of estimates and cut its dividend. The bank also said it will raise $10 billion through a stock sale and that the company will need to set aside money for bad loans through the coming year. Shares fell 18% Tuesday. (Full story)

Also late Monday, Wells Fargo (WFC, Fortune 500) and Citigroup (C, Fortune 500) both agreed to a legal standstill in their battle for Wachovia (WB, Fortune 500). (Full story)

AIG (AIG, Fortune 500) was in the spotlight Tuesday, in the second of several House hearings into what led to the current crisis. The government had to bail out the insurance giant with an $85 billion credit line last month to keep it from imploding.

On Monday, the House Oversight Committee questioned Richard Fuld, chief executive of Lehman Brothers, which went bankrupt last month.

A variety of bank stocks fell Tuesday, including Citigroup (C, Fortune 500), JP Morgan Chase (JPM, Fortune 500), Goldman Sachs (GS, Fortune 500), Merrill Lynch (MER, Fortune 500) and Morgan Stanley (MS, Fortune 500).

But the declines were broad, with 28 of 30 Dow components sliding. Besides the financials, other losers included Walt Disney (DIS, Fortune 500), GM (GM, Fortune 500), Pfizer (PFE, Fortune 500), Home Depot (HD, Fortune 500) and Wal-Mart Stores (WMT, Fortune 500), all of which lost between 4% and 5%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners three to one on volume of 800 million shares. On the Nasdaq, decliners topped advancers by two to one as 1.5 billion shares changed hands.

Global markets: Markets overseas were mixed Tuesday, a day after taking a drubbing everywhere.

Australian markets rallied after the government cut short-term interest rates by a full percentage point, surprising investors. Asian markets ended lower.

European markets were mixed. Russian markets opened late, but managed gains after having been shut down Monday following a steep selloff. (Full story)

(Europe: The new Wall Street?)

Credit markets: Measures of bank nervousness remained at elevated levels Tuesday, but showed some improvement.

The difference between the 3-month Libor and the Overnight Index Swaps fell to 2.93% from a record high of 2.97% earlier in the day. The Libor-OIS spread measures how much cash is available for lending between banks and is used by banks to determine rates. The bigger the spread, the less cash is available.

But 3-month Libor, the rate banks charge each other to borrow for three months, rose to 4.32% from 4.29% Monday.

The TED spread, which is the difference between 3-month Libor and what the Treasury pays for a 3-month loan, fell to 3.35% after hitting an all-time high of 3.95% Monday.

The wider the spread, the more reluctant banks are to lend to each other rather than from the federal government. When markets are fairly calm, banks charge each other premiums that are not much higher than the U.S. government.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose to 0.97% from 0.44% late Monday, with investors looking for a slightly better return on their money. Last month, the 3-month bill skidded to a 68-year low around 0% as panicked investors fled stocks.

Treasury prices dipped, propelling the yields. The benchmark 10-year note fell 6/32, lifting the corresponding yield to 3.47% from 3.45% Monday. Treasury prices and yields move in opposite directions.

Oil and gold: U.S. light crude oil for November delivery rallied $1.39 to $89.20 a barrel on the New York Mercantile Exchange, after ending the previous session at an eight-month low.

COMEX gold for December delivery rallied $14.60 to $880.80 an ounce.

Other markets: In currency trading, the dollar slipped against the euro after hitting a 14-month high against the European currency on Monday. The dollar also slipped against the yen, giving up earlier gains. (Full story)

The price of gas decreased for the 20th consecutive day, according to a survey of credit card activity.

Worried about your retirement? Tell us your story To top of page











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