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A Cautious, Optimistic Mood on Wall Street

September 30, 2008 2:04 PM

ABC News’ Erin Keohane and Sarah Amos report: On a somber Wall Street and at an anxious New York Stock Exchange, there was a bit of relief this morning -- 18 hours after one of the worst market closes in U.S. history -- as the markets began the day up.

For traders walking through the media storm that was the Financial District this morning their mood was slightly nervous. Most of the NYSE floor traders would not talk to the press; some feared losing job security, others were knocking Congress and party politics for not voting on a bailout. And some were even optimistic that the Dow Jones industrial average would open up 200 points.

From the street to the floor the mood was heightened.

"It's a really frightening time. I don't know if I'm going to have a job by next week, you know it's really unfortunate that we're in this situation," said George Metzler on his way to work.

John Focshino tried to be light about the market's situation. "My worries? That I lose my job. I lose all my money. I get thrown out on the street and have nothing to eat," he said trying to chuckle a bit, before adding, "Those are everybody's worries. So, it's a very frightening time for all of us. Um, my job, I don't know where my job is going. I don't know, I don't know where the future lies. And we are very uncertain, these are very scary times."

A "get-it-done" mentality was felt as soon as one walked on the exchange floor, which was already covered with newspaper and magazine scraps as well as disposed napkins. This did not slow traders from whizzing around Barclay's and Bank of America trading posts 10 minutes before the bell sounded officially opening the markets.

With just two minutes before the ringing of the bell, the stock exchange floor shifted into fast forward: Traders buzzed past, conversations grew louder and quicker.

Once the bell was heard, traders turned anxiety into production. Several trading posts were crowded with 10 to 15 traders trying to secure a stock at a low rate. National City Bank generated the largest crowd two minutes after the market opened with approximately 25 traders crowding around.

As a bystander the population of traders on the floor this morning seemed to increase 25 percent from Monday morning. This was not confirmed by the NYSE, although it is understood the number of traders on the floor for the market opening varies and it could lead one to speculate that every trader on the floor this morning wanted to partake in rallying the market.

However frustration and fear still existed on some traders’ faces as they roamed the floor three minutes after the bell. Heads were in their hands just as they were after Monday’s congressional vote. Yet other traders had begun joking; one trader even joked with our media liaison, pestering her for a long-awaited date.

Anna Camara was still reeling this morning from Congress' no vote on the bailout plan. "When I heard the news that the bill was not passed I was in shock. I mean I actually was thinking about putting more money back into the market. Thank God I didn't," Camara said.

Even with the strong open, it is clear from the street to the floor that traders are still cautious, but determined to rally the market and the American public. At this point they will do it without congressional support.

September 30, 2008 | Permalink | User Comments (4) | TrackBack (0)

What is “Mark to Market?”

September 30, 2008 1:16 PM

ABC News’ Daniel Arnall reports: It seems like some of the discussion on Capitol Hill is turning to a change in accounting rules to address the current seizing of the credit markets.

Here’s a look at what people are talking about when they’re addressing “Mark to Market” accounting rules:

* The mark to market rule (also known as "fair value" accounting) went into effect Nov. 15, 2007.

* It’s a requirement created by the Financial Accounting Standards Board (FASB) – which has since 1973 been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports.

* The mark to market rule forces public companies to put a “fair value” on their assets or liabilities each quarter. Meaning, if they hold a security on their books, they have to report the actual market value of that asset instead of the price they’d hope to get at some future time.

* Under the FASB’s definition, fair value is the price “in an orderly transaction between market participants.” And it’s not just any buyer. The rules require the buyer to be “knowledgeable, having a reasonable understanding about the asset or liability and the transaction based on all available information.”

* Because there’s no market at this time for the mortgage-backed assets that many banks and financial institutions have invested in, the institutions are taking massive write-downs on these assets quarter after quarter.

* Bloomberg reports that this year the market to market accounting rule has wiped out more than $100 billion in asset values tied to home mortgages and loans issued to finance acquisitions as those loans have started to fail at historically high rates.

* It’s not just about write-downs. It also allows companies that hold assets that have appreciated in value to realize those gains right away – for example, the oil/gas industry holding massive reserves of oil that have recently appreciated in value.

* A change in the standard wouldn’t change the value of the assets, but would likely slow the write-downs in companies are being forced to take each quarter.

* Critics say changing this rule wouldn’t actually bring participants back to the market or increase buyer interest in mortgage-backed securities; it would simply allow companies that purchased these investments to keep their exposure to the mortgage markets out of public view.

* Newt Gingrich (and the rest of the conservative American Enterprise Institute) is pushing this idea.

September 30, 2008 | Permalink | User Comments (9) | TrackBack (0)

For Whom the Bell Doesn't Toll

September 29, 2008 11:01 AM

ABC News' Alice Gomstyn reports: Was it a bad omen or just a glitch? On the day that the government’s massive financial system rescue plan heads to the House, traders waiting for the New York Stock Exchange to open were greeted by silence –- the iconic opening bell failed to sound.

A spokeswoman for the NYSE said that an “isolated electrical issue” was to blame and that the day’s closing bell should operate as usual.

She said that, to her knowledge, the bell had never previously gone silent.

If she’s right, that would be a mighty long streak.

Trading bell history dates back to the 1870s, according to NYSE. At the time, a Chinese gong was used –- it was replaced with brass bells when the exchange moved to its current home in 1903.

Today, the exchange uses four bells, each 18 inches in diameter, and is also home to one spare. The backup bell was made in the 1980s and, because bells meeting NYSE specifications hadn’t been made in quite some time, the bell’s manufacturer had to bring employees out of retirement to do the job.

-- With reports from ABC News' Dan Arnall.

September 29, 2008 | Permalink | User Comments (34) | TrackBack (0)

The Bailout Plan: No Quick Fix

September 29, 2008 9:36 AM

ABC News' Betsy Stark reports: Assuming Congress comes up with the votes to seal the deal on this enormous rescue plan, we can all breathe a sigh of relief. Right? More like maybe…and not so fast.

The immediate goal of this bill was to prevent an economic calamity, which we were told was just days away if Congress did not act swiftly. Assuming the bailout bill is passed, we will soon know whether the immediate crisis has been averted, whether credit markets are thawing and whether banks are lending. We will soon know whether a measure of confidence has returned to the financial system. We can look at where Americans are putting their money. Will they trust more than government-guaranteed treasury bills? We can look at what happens to very short-term interest rates. Will they go up to more normal rates? Both will be important clues.

But we are already seeing today the daunting task that lies ahead.

First there is the reality of putting this bill into action. The Treasury Department will need to hire a team of sophisticated asset managers at government salaries to come up with fair prices for a mass of arcane financial securities invented by MIT doctorates that no one wants to buy. Eligibility guidelines need to be set for helping homeowners avoid foreclosure. A debt insurance product and premium schedule needs to be created for financial institutions participating in the bailout. Newt Gingrich called it all a "monstrosity" on Sunday’s "This Week." Today in The New York Times, William Seidman, the former chairman of the Resolution Trust Corp., said if this works out "without some tremendous snafu…it will be a miracle."

And I direct your attention across the pond today, where the contagion has spread. Today the British nationalized the giant mortgage lender Bradford and Bingley. On Sunday night the Netherlands, Belgium and Luxembourg bailed out the huge Fortis bank to the tune of $16 billion after private buyers walked away from the deal. Sound familiar?

The $700 billion rescue plan is no quick fix for what ails the economy. In the purging of all this bad debt from all these overleveraged Wall Street institutions -- and Main Street consumers -- there will be more bank failures, more homes that fall into foreclosure, more jobs that are lost. This bill -- if we get it -- is emergency first aid. But it is no magic bullet.

September 29, 2008 | Permalink | User Comments (17) | TrackBack (0)

Bought Before It Could Fail? Citi Acquires Wachovia

September 29, 2008 9:04 AM

ABC News' Alice Gomstyn reports: On the heels of JPMorgan’s purchase of Washington Mutual –- the largest bank failure in U.S. history -– a new bank merger has been announced. This time, though, the Federal Deposit Insurance Corporation assures us that a bank failure wasn’t part of the mix.

In a statement to the press this morning, the FDIC announced that Citigroup Inc. will acquire the banking operations of Charlotte, N.C.-based Wachovia.

The FDIC indicated that the Citi deal was good both for the government and Wachovia customers.

“All depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund. Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC,” according to the press statement.

But it’s not guaranteed that the FDIC will not eventually have to shell out money on the deal.

Citi has agreed to absorb up to $42 billion in losses associated with Wachovia’s loans, but the FDIC, according to the statement, will be on the hook if there are any losses beyond that. In return, the FDIC will receive $12 billion in preferred stock and warrants.

FDIC chairwoman Sheila Bair said the deal was necessary “to maintain confidence in the banking industry given current financial market conditions."

Read the full FDIC statement here.

September 29, 2008 | Permalink | User Comments (30) | TrackBack (0)

Understanding the Financial Crisis and Bailout

September 25, 2008 10:35 AM

ABC News’ Betsy Stark reports: Listening to the MBA president trying to explain the roots of the financial crisis last night, it was easy to imagine why Americans are so reluctant to sign on to this $700 billion bailout. It's not just that they resent having to rescue Wall Street fat cats who have been living the high life while they struggled to fill their gas tanks and send their kids to college, it's that most of them have no idea -- in economic terms -- what this crisis is all about.

Most Americans understand the stock market -- a little. We show them pictures of the trading floor of the New York Stock Exchange and half the population is invested directly or indirectly in stocks. They know, in rough terms, that the value of their nest eggs goes up and down with the Dow.

But it starts to get a little fuzzy after that. The financial literacy problem in this country is well-documented. Many Americans with 401ks couldn't tell you what's in them and, despite the lesson of Enron,that diversification is the first rule of investing. It's safe to say lots of hardworking Lehman Brothers, Bear Stearns and AIG employees probably lost their life savings when those companies became part of the carnage of this crisis.

We've been told and we've been reporting that frozen credit markets are at the heart of this crisis. But even a lot of smart people don't have the foggiest idea what these invisible markets do for the economy, even when they are not frozen. We've offered various metaphors -- "the plumbing of the economy" and "the circulatory system" -- and Fed Chairman Ben Bernanke has tried his best in Congress over the last couple of days to explain what happens when the plumbing and the circulation fail. But it wasn't quite adding up to a $700 billion bailout -- until, perhaps, last night.

Even if ordinary Americans are still not able to connect the dots of how the malfunctioning of markets they can't see or understand has morphed into a crisis of epic proportions, they are getting the message about where this all could lead if Congress doesn't cut a deal: Stocks will tank, nest eggs will crumble, retirement dreams will disappear, lending will halt, people will not be able to buy houses, home prices will fall some more, foreclosures will rise some more, consumers will hunker down, corporate profits will sink, jobs will be lost … and those are consequences everyone can understand.

September 25, 2008 | Permalink | User Comments (75) | TrackBack (0)

Bush Tries to Sell $700 Billion Bailout

September 24, 2008 6:16 PM

ABC News' Charles Herman brings you this pop quiz: Who’s the most powerful man according to Wall Street?

President Bush? He will address the nation directly this evening to try to convince Main Street that his $700 billion bailout plan is not just for Wall Street. In his 32nd prime-time address, he will, according to aides, make clear to the American people that the cost of not acting is greater than acting. Will his speech get taxpayers to support the plan?

Treasury Secretary Henry Paulson? After conducting shuttle diplomacy between the House and Senate, Paulson took time to answer questions from the House Financial Committee. Skeptical lawmakers still have questions about excessive pay, homeowners facing foreclosure, oversight and what exactly taxpayers will get from the bailout. Can Paulson make the case and save Wall Street before Wall Street sends another company into the abyss (Hello Washington Mutual!).

Congress? A lot of angry, doubful, and frustrated members of Congress aren’t sure they like being rushed into approving a $700 billion bailout plan when so many of their constituents are saying, Just Vote No. Can Congress agree to bailout plan and get it to the president’s desk before Wall Street can’t wait any longer?

The presidential candidates? McCain wants to postpone Friday’s debate and go to Washington to help resolve the vote on the bailout. Obama thinks the debate should go on saying it's important “now more than ever.” How will their votes impact whether or not the bailout plan is approved?

Warren Buffett? With a $5 billion investment in commercial bank Goldman Sachs, billionaire Buffett’s big cash infusion was a just the reassuring sign the nervous market needed. If the Oracle of Omaha, a world class investor, thinks its time to get into financial stocks, maybe everyone else should too?

So while investors tried to figure out who has the answers and wondered if and when Congress will approve a bailout plan, the Dow closed down just slightly on Wednesday.

The Dow Jones closed down 29 points to close at 10,825.17 (down 0.27%).  The Nasdaq ended the day up 2.35 points to close at 2,155.68 (up 0.11%).  And the S&P closed down 2.35 (0.20%)

September 24, 2008 | Permalink | User Comments (6) | TrackBack (0)

$700 Billion Bailout Creates Massive Headaches

September 24, 2008 9:56 AM

ABC News’ Betsy Stark reports: Did anyone else notice yesterday how many senators were holding their heads in their hands? Maybe it's not surprising that the Treasury Department's request for $700 billion to spend largely as it pleases -- issued with a warning from the Federal Reserve that not granting the request could lead to financial catastrophe -- is enough to give anyone who has to vote on that request a massive headache.

As Montana Senator Jon Tester put it so well at yesterday's hearing: "Why do we have one week to determine $700 billion that has to be appropriated or this country's financial system goes down the pipes?"

The timeline for approving this rescue package does seem absurd, until you remember that in a 24/7 global economy with markets that react emotionally in real-time to rumor as well as fact, the opportunity for considered debate is trumped by the potential for panic-induced devastation. Paulson and Bernanke -- who we are reminded is the nation's pre-eminent student of the causes and consequences of the Great Depression -- seem to be warning us that as scary as it is already, it could get a lot scarier if this $700 billion firewall is not erected.

Which brings us to that number: why $700 billion? Is it really going to cost that much? Is it possible, as some senators were asking yesterday, that it might not be enough? And what is the likelihood, as Chairman Bernanke suggested yesterday, that it will end up costing a lot less?

Keep in mind that what the government is trying to do here is more art than science. They don't really know what it will cost to buy up the bad debt on all those balance sheets but they want to make sure they have enough in their wallet to cover not only the estimated cost but a few ugly surprises. Paulson also argued yesterday that he needs a big number to make a credible statement to global financial markets that the size of the solution is big enough to match the size of the problem. Roughly speaking, the sum of the good money has to be at least equal to the sum of the bad or the markets won't believe in this firewall.

What this $700 billion is not, if it's any comfort to taxpayers, is a check payable immediately from Main Street to Wall Street in the full amount. Paulson and Bernanke call it an investment, not an expenditure, and if it works right, only a portion of that number will actually be spent. If it works right, the legendary investor Warren Buffett said this morning that he thinks taxpayers might even make a profit on this bailout. That may sound a little blue sky in the midst of so many dark clouds but they don't call him the Oracle of Omaha for nothing.

September 24, 2008 | Permalink | User Comments (51) | TrackBack (0)

Should Bailout Extend Beyond Mortgages?

September 23, 2008 8:35 AM

ABC News' Betsy Stark reports: Trivial Pursuit: Economic Meltdown Edition -- What does TARP stand for? If you said: “Troubled Asset Relief Program,” congratulations. Which brings us to our next question: Can you name the troubled assets for relief?

One of the most daunting tasks ahead for Congress as it attempts to pound out the details of this $700 billion bailout is which "troubled assets" should be included in this monumental rescue. It's not every day in the midst of an economic crisis the government comes along with a virtual blank check to pay for whatever the Treasury secretary thinks is necessary to restore health and confidence to the financial system.

There's a reason the government called it TARP and not MARP, which would have made it the Mortgage Asset Relief Program. The government wants the latitude to help other industries that may be entwined in this mess… or maybe it just wants the political maneuvering room it needs to cut a deal, which may mean extending this bailout aid to other over-leveraged industries… or other simply "troubled" industries.

In addition to all those bad mortgage assets threatening the financial system, there are also hundreds of billions of dollars of troubled asset-backed securities that have been sold against auto loans, student loans and credit card loans. Should the holders of these troubled assets be bailed out too? Including them would almost surely swell the price tag of this bailout beyond the already-staggering $700 billion. Is that what's necessary to restore the nation's financial system to good working order?

Are You Happy With the Bailout Ideas? Tell ABC News Your Story

Americans have been bingeing on all kinds of debt for decades. Wall Street bought it, dressed it up as fancy securities, sold it and resold it and guess who has ended up holding the bag? If you said the taxpayer, once again, congratulations.

September 23, 2008 | Permalink | User Comments (197) | TrackBack (0)

Stocks Fall, Oil Makes a Surprise Return

September 22, 2008 4:01 PM

ABC News’ Daniel Arnall and Scott Mayerowitz report: It was another rough day on Wall Street, with the Dow Jones industrial average failing 372.75 points today. The main driver: fear over the government’s plan to spend $700 billion to buy bad mortgage investments from banks.

To make matters worse, it was a wild day for the oil markets. Just when you thought the price of oil and gas was going down a bit, it sneaks up and bites you.

The price of a barrel of oil today shot up $16.37 to close at $120.92. It was the largest single-day jump ever in the price of oil. At one point, oil was up a mind-blowing $25 a barrel.

The previous one-day price jump record of $10.75 was set June 6.

In the last four trading days, crude has made tremendous gains, ending a two-month decline that brought the price -- briefly -- below $100 a barrel. Oil prices are still below the record of $147.27 reached in July, but a little too close for comfort.

There is never one thing that drives up the price of oil, but part of today’s rise came as investors continued to move money away from stocks and into other investments. Commodities -- like gold and oil -- have historically been safe-havens for investors hoping to weather a stormy stock market.

The falling dollar also likely contributed to the day’s big crude spike. Oil is sold world-wide in U.S. dollars. So when the dollar falls against other currencies, foreign buyers of oil can buy more black gold when they spend the same amount of their local currency.

But oil analyst Stephen Schork says he believes something else might be at play: short selling.

Schork says he believes the big jump in June came after a big oil marketing firm had placed a big bet that the price of crude was going to drop. When that didn’t come to fruition, the company had to cover its bet by buying a lot of oil contracts, and quickly. Other market players knew this firm had to buy the contracts, so they effectively said, “We know you need this now, so pay up.”

“I think someone today has obviously gone bust,” Schork said. “This was obviously a short squeeze of epic proportions. Some large or just a cadre of bears stole short this market and they just got a squeeze of a lifetime today.”

Schork says there’s no news about supply and demand that would justify such a big move, so consumers shouldn’t necessarily worry the retail price of gasoline or heating oil will spike too.

September 22, 2008 | Permalink | User Comments (82) | TrackBack (0)