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mark1447

Bailout Fails To Calm US, Global Markets

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Dow Drops Below 10,000 For 1st Time Since '04

 

The government's $700 billion rescue, aimed at rebuilding economic confidence, appeared to sound a global alarm instead on Monday, triggering a fearful international sell-off as the U.S. began work on a plan that investors feared would be too little and too late to stave off a worldwide recession.

 

 

As markets around the world tumbled amid fast-spreading anxiety, officials in Washington worked quickly to put the new financial plan into effect and to shovel more money into the banking system.

 

The Treasury Department named a former Goldman Sachs executive, Neel Kashkari, now Treasury's assistant secretary for international affairs, to oversee the new program and said it would increase its bond sales to help pay for the huge package that was approved with fanfare and signed Friday by President George W. Bush.

 

Trying to do its part, the Federal Reserve increased a short-term loan program to as much as $900 billion and announced it would begin paying interest on reserves that banks keep with it.

 

Bush sought to reassure panicking markets. "It's going to take awhile to restore confidence in the financial system. But one thing people can be certain of is that the bill I signed is a big step toward solving this problem," he said in San Antonio, Texas.

 

Nobody seemed reassured. Chaos in the financial system seemed to be growing by the minute.

 

The Dow industrials plunged below the 10,000 level for the first time in four years, and at one point were down as much as 800 points before recovering to close with a loss of 369. All sectors -- not just financial companies - were being sold off.

 

The fear was reinforced by new problems among European banks and fresh worries in Asia of a spreading global recession that would harm the continent's prized ability to export.

 

It all started with a U.S. housing boom, helped along by low interest rates and government encouragement for more home ownership. Too many home mortgages were written for too many people who really couldn't afford them. Banks and other financial companies that made these home loans then resold them. Many were packaged into Wall Street securities and sold to investors. There was lax federal regulation over the process.

 

It worked as long as home prices were going up. But when they started to fall several years ago, the process began to collapse. Many people suddenly owed more on their homes than they were worth. Rising interest rates made it harder to meet monthly mortgage payments that were resetting to higher levels. Foreclosures increased. The infection spread as markets dried up for mortgages and mortgage-backed securities.

 

Now, many banks and financial institutions don't have enough money to cover their obligations as a result of the plunge in the value of these securities on their balance sheets. Many are hoarding what cash they have. That's what the bailout is supposed to help fix, with the government buying these hard-to-value assets and reselling them later in hopes of allowing banks to start lending again.

 

But trust among banks is in short supply on a battlefield littered with a growing number of dead, wounded and transformed financial institutions.

 

Gone are Wall Street investment banks Bear Stearns and Lehman Brothers. Merrill Lynch gave itself up in a fire sale to Bank of America. Washington Mutual ceased to exist,and Wachovia, once the nation's fourth largest bank, is being acquired -- either by Wells Fargo or Citigroup. American International Group, one of the world's largest insurers, is struggling after a big loan from the government kept it from collapsing. Mortgage giants Fannie Mae and Freddie Mac have been essentially taken over by the government.

 

Meanwhile, the credit squeeze has spread from Wall Street to Main Street, affecting everything from new home and car loans to student loans, credit card availability and even short-term loans to help businesses expand or meet payrolls. A darkening recessionary cloud is spreading over a nation where two-thirds of the economy is derived from consumer spending and where there have been nine consecutive months of job losses.

 

Frank: GOP Housing Attacks Racially Motivated

 

Rep. Barney Frank, D-Mass., said Republican criticism of Democrats over the nation's housing crisis is a veiled attack on the poor that's racially motivated.

 

The chairman of the House Financial Services Committee, said the GOP is appealing to its base by blaming the country's mortgage foreclosure problem on efforts to expand affordable housing through the Community Reinvestment Act.

 

Frank said that blame is misplaced because those loans are issued by regulated institutions. He said far more foreclosures were triggered by high-cost loans made by unregulated entities.

 

Frank is also dismissing charges the Democrats failed on their own or blocked Republican efforts to rein in Fannie Mae and Freddie Mac, two mortgage companies now taken over by the federal government.

 

Source:

 

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