After the Rescue:
“Worldwide Wreckage”
Ed Note: See comments below for day by day, blow by blow summaries of what turned out to be the worst week in the history of the Dow 30.
Monday Morning.
After Europe’s traumatic weekend (see comments here), European stock markets fell roughly 7% Monday.
And with an hour ’til closing time, the Murdoch (formerly Dow) 30 is down another 700 points (6.8%), to roughly 9,600, breaking the psych barrier at 10,000 for the first time since 2004.
Along the way a new all-time point drop was notched — 806 — breaking the record set way back uh, let’s see … Last week.
.
Broad & Wall Street, 1929
The central banks and treasuries have shot most of their bullets. No one has yet taken heart.  Credit markets are broken worldwide. Nothing else now matters.
It is truly The Great (debt) Unwind that some people have been predicting for fifteen years — ever since the advent of Excel and email jolted high-tech Structured Finance to life in the money centers.
Traders this afternoon are sniffing “capitulation,” and supposing tomorrow we may have a bounce. Perhaps even coordinated rate cuts by every central bank from Tokyo to Washington.
But people with slightly longer-term views are saying Dow 8,000 might prove to be a floor.
It’s been a wild ride, since …
MY OWN TWO CENTS, based on awareness of how vast the universe of structured finance securities is, and of how confidence in the methodologies used to rate and evaluate them has been shaken, and on watching the mortgage business get dismantled daily, is that the worst is far from over.
Recession, asset deflation (houses mostly), prolonged credit contraction. The Dustbowl returneth … But what do I know.
The sign at the Cyclone says “HOLD ONTO YOUR WIGS AND CAR KEYS.”
The mortgage-bond failures demonstrate that the rating agency methodologies used to evaluate and rate high-tech “structured finance” bonds are seriously flawed.
This wethinks is why the private bond markets across all sectors (well beyond mortgage bonds) have seized up. The rating methodology failure means no one in the world really knows what their high-tech bonds are worth.
A radical thought, then: Perhaps the authorities might institute 90 days of price controls on the teeming mystery bonds to quell the panic …
ed says:
Marketwatch.com’s headline at the closing bell: Worldwide Wreckage.
True, in the last hour the Dow rallied 300 points to close down about 400.
But after the bell Bank of America — one of the four or five money-center institutions thought likely to survive — delivered another shocking and unexpected blow:
QUOTE
Marketwatch.com — Bank of America on Monday said its third-quarter profit fell by more than half on the back of rising charges for soured credit market investments and higher credit card charge offs.
The company also said it was cutting its dividend in half, to 32 cents a share and will sell up to $10 billion in common stock to beef up its balance sheet.
Bank of America said it earned $1.18 billion, or 15 cents a share, compared to $3.70 billion a year ago, or 82 cents a share.
Analysts polled by FactSet Research had expected the comp[any to report earnings of 61 cents a share.
Bank of America said the dividend cut should preserve about $1 billion a year in much needed capital.
October 6th, 2008 at 3:56 pm
ed says:
Perhaps part of the problem has been that for ten years or so on television Valley Girls with big hair and bright eyes have been employed to explain the world.
This afternoon on Fox Business Channel, f’rinstance (click the video screen mid post) — with the Dow down about 600 points, viewers were treated to vivacious Tracy Barnes:
QUOTE
I’m gonna give you some GOOD news! In the midst of all this, the market fall, and the credit markets tightening, foreign officials saying the U.S. is gonna lose its credit rating — the dollar is UP! More than it’s been — it is SURGING! The Euro is down — we’re at $1.35 against the Euro, this is a thirteen-month low! And ya know what it’s telling you?! It’s telling you that, people might think WE suck, but THEY suck MORE! So they’re coming to us, they’re buying our dollar — I think that’s good news, Liz.
October 6th, 2008 at 6:09 pm
ed says:
Tuesday, the Dow closes down 508 points.
And as for the idiotic Tracy Barnes (prior comment): The dollar has fallen from 106 Yen last week to … 101.36 or thereabouts at the moment.
For years 110 yen was the zen-laden barrier, which the Japanese government would defend (by buying dollars with yen) at every challenge (wishing their currency to remain relatively weak so they can sell electronics and cars to Joe Sixpack at low prices).
But the Japanese retreated from 110 across the past year’s debacle, and the zen-laden level of 100 Yen to the Dollar is now in the sights of the currency traders. The low so far today is 101.07.
October 7th, 2008 at 3:16 pm
ed says:
Also Tuesday — Iceland’s banks swoon overnight and get nationalized — and the government asks Moscow for a big loan to get through.
The first sovereign victim of the crisis, perhaps.
October 8th, 2008 at 2:04 pm
ed says:
Wednesday, the long awaited coordinated central bank rate cut — by the US, Canada, Britain, European Union, Switzerland and Sweden. Tokyo sat out but issued a statement approving the move.
Murdoch (formerly Dow) 30 were down on the news 191 points.
Iceland, Iceland … Who’s next?
October 8th, 2008 at 5:50 pm
ed says:
Thursday — the US ban on short-selling financial stocks is lifted.
And the Dow closes down 679 points, at 8,579.
Here’s Joltin’ Jumpin’ Jersey Jim Cramer re how the big short sellers destroy targeted stocks.
October 9th, 2008 at 2:26 pm
ed says:
The dollar as we breathe is cracking the 100 Yen mark, trading about 99.5.
Low on the day 99.35.
Time to bounce perhaps … at least for a while.
October 9th, 2008 at 4:31 pm
ed says:
The Week of Worldwide Wreckage comes to an end with the Dow down another 128 points to 8,451.
But that hardly tells the story. The day’s low was 7,882! And the high 8,901.  Over 1,000 point swing on the day.
The cause: Talk by the g7 ministers, including paulson, about re-engineering the global finance system (by Monday morning if possible). See texts below.
The Dow 30 index is now down 40% from its (deeply deluded) all time high last October.
A 20% drop is usually called a crash. So we’ve now had two.
This week’s drop in the Dow 30 — 18% — was the worst week in the index’s 122 year history.
Morgan Stanley is on the ropes. Everyone now agrees Lehman was indeed too big to fail. So everyone is expecting anything at all to be done to keep anybody else of that dimension out of bankruptcy and meeting obligations.
Bush came out today to talk to the TV. Mumbled that the fundamentals of the economy were sound. Ten minutes later the Dow was down another 400 points.
One might think the lesson is that morons in high places are a bad idea. But then what must one think of the Palindrones?
Meanwhile in the Other Worlds, joy:
“We are very happy that America’s economy is in jeopardy and they are paying the price for their misdeeds. God is punishing them.” The Ayatollah Jannati.
October 10th, 2008 at 7:13 pm
ed says:
Here is the G7′s opening communique, Friday afternoon.
WASHINGTON (MarketWatch) – The Group of Seven finance ministers and central governors released on Friday the following plan of action to address financial disruptions.
Credit crisis: Global responses
G7 nations vow action
Finance ministers outline sweeping commitment to “urgent and exceptional” actions to stabilize financial markets.
The G-7 agrees today that the current situation calls for urgent and exceptional action. We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth. We agree to:
1. Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.
2. Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.
3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.
4. Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.
5. Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.
The actions should be taken in ways that protect taxpayers and avoid potentially damaging effects on other countries. We will use macroeconomic policy tools as necessary and appropriate. We strongly support the IMF’s critical role in assisting countries affected by this turmoil. We will accelerate full implementation of the Financial Stability Forum recommendations and we are committed to the pressing need for reform of the financial system. We will strengthen further our cooperation and work with others to accomplish this plan.
End of Story
October 10th, 2008 at 7:27 pm
ed says:
And here is Paulson’s official word after the first meeting:
At today’s meeting of the G-7 Finance Ministers and Central Bank Governors, we finalized an aggressive action plan to address the turmoil in global financial markets and the stresses on our financial institutions. This action plan provides a coherent framework that will direct our individual and collective policy steps to provide liquidity to markets, strengthen financial institutions, protect savers, and enforce investor protections.
The G-7 is compelled to robust international partnership and cooperation. Never has it been more essential to find collective solutions to ensure stable and efficient financial markets and restore the health of the world economy.
Global financial market conditions are severely strained. In the United States, our economy has been facing a prolonged period of uncertainty and our financial markets are experiencing unprecedented and extraordinary challenges.
A root cause of this situation is the housing correction and a lack of confidence in mortgage assets, as well as a lack of confidence in many of the financial institutions that hold these assets. We are squarely focused on the immediate need to stabilize our financial markets, and recognize that investor confidence is critical to restore liquidity and enhance the stability of our financial system.
As recent developments have demonstrated, the market turmoil is a global event. Governments around the world have taken actions to address financial market developments, and international cooperation and coordination has been robust. It is critical for governments to continue to take individual and collective actions to provide much-needed liquidity, strengthen financial institutions, enhance market stability, and develop a comprehensive regulatory response. We must continue to closely coordinate our actions and work within a common framework so that the action of one country does not come at the expense of others or the stability of the system as a whole.
Central banks from around the world have acted together to provide additional liquidity for financial institutions, taking the necessary steps to support the global economy. The Federal Reserve has established swap lines with nine central banks to reduce pressures in global short-term U.S. dollar markets. Additionally, the U.S. Treasury implemented a temporary guaranty program for the U.S. money market mutual fund industry.
Here in the United States, the members of the President’s Working Group on Financial Markets (PWG) made it clear that we will coordinate the use of our existing and new authorities to restore market confidence. Other countries are considering appropriate programs given their national circumstances, and we pledge to stay in close contact as they move forward with their plans.
I briefed my colleagues on the work we are pursuing to implement swiftly and thoughtfully the new financial rescue package. We are developing strategies to use the authority to purchase and insure mortgage assets and to purchase equity in financial institutions, as deemed necessary to promote financial market stability. As we develop plans to purchase equity, as in the approach we are taking to broad mortgage asset purchases, we are working to develop a standardized program that is open to a broad array of financial institutions. Such a program would be designed to encourage the raising of new private capital to complement public capital. Consistent with the legislation, any equity the government purchases through a broadly available equity program would be on a non-voting basis, except with respect to the market standard terms to protect our rights as investors.
Securities regulators around the world have taken measures to enhance market stability by addressing market abuse. Here in the United States, we have taken steps to protect the savings of the American people by increasing deposit insurance limits, and the European Union member states have raised individual deposit limits to an EU-wide minimum.
The G-7 and others are working together through the Financial Stability Forum (FSF) to ensure a comprehensive, international regulatory response to the financial market turmoil. FSF Chairman Mario Draghi reported to us on the good progress that has been made in improving prudential supervision and regulation, increasing disclosure and transparency, and enhancing accounting frameworks. I am committed to making sure this work continues. We are also committed to tackling the next steps laid out by Chairman Draghi to be done by the end of this year and our ambitious agenda for 2009.
October 10th, 2008 at 7:33 pm
ed says:
It’s Miller Time.
Go to Naked Capitalism or The Financial Times if you need to wallow in our disaster.
Here’s Bush touring the disaster area.
And the latest weather worry.
October 11th, 2008 at 12:21 am