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N.Y. Governor Calls for Federal Relief for States

October 29, 2008 12:35 PM

ABC News' Huma Khan reports: In testimony before the House Committee on Ways and Means, New York Gov. David Paterson chided the federal government for not providing enough oversight to prevent the financial crisis and urged it to provide aid to states to curb their budget deficits. In contrast, South Carolina Gov. Mark Sanford called for less federal involvement in state matters and more flexibility.

“There is no doubt we are currently in a statewide recession,” Paterson said. “And if history is any guide, the recession will be more severe and longer lasting in New York state than it is in the nation as a whole.”

Paterson said he will propose the largest spending reductions in the history of the state next year.

“Funding for many worthy programs, several of which I personally support, will have to be curtailed dramatically,” he said. “This is not something I want to do, but it must be done.”

Paterson said he expects the needs for social services to increase while investment in infrastructure by states declines. He proposed federal funding for states for transportation and water improvement projects.

He called on the federal government to assist states, especially in the form of “direct and immediate fiscal relief” to help close budget deficits. He emphasized that New York had been “shortchanged” by federal officials in terms of aid, saying that the post-9/11 recovery package the federal government promised the state was never given.

Other measures he proposed included: an extension of Emergency Employment Compensation benefits and modernization of the unemployment insurance system, a temporary boost in funding for the food stamp program and a moratorium on federal regulations that negatively impact state budgets.

“States didn’t cause this crisis and we shouldn’t be left to deal with it alone,” he said. “A rescue package from the federal government will help soften the blow for average Americans. It could make the difference between targeted, surgical spending reductions that will help heal our fiscal condition… Unless states receive fiscal relief, I believe the goal of stabilizing the economy cannot be achieved.”

Trenton, N.J. Mayor Douglas Palmer echoed the theme, emphasizing that a partnership needs to exist between the federal government and city governments.

Sanford, meanwhile, strongly urged Congress to not approve a new stimulus package, saying that it would only boost the national budget deficit.

“I believe that some time in the not-so-distant future we’re going to reach a breaking point when that $52 trillion will come due, and that our potential inability to pay will have frightening ramifications by either completely trashing the value of the dollar or creating hyperinflation, which robs from every middle class worker across America,” he said.

Sanford was referring to a stimulus package under consideration by Congress that would help states in financing infrastructure projects. The size of the new plan is expected to between $150 and $300 million, although an exact dollar figure is not yet known.

 

The economic crisis, Sanford said, was predictable “for the simple reason that gravity always works… One could go as far back as Biblical times and look at the passage of the seven fat and seven skinny cows coming out of the Nile in Pharaoh’s dream to remember that this notion of business cycles, credit cycles, the up-and-down of the economy, is one of the constants in history."

Sanford questioned the need for more federal government expansion and involvement in states’ affairs, instead asking for more state freedom and flexibility.   

An expansion of federal government scope “will create strong negative unintended consequences, particularly with the $52 trillion dollars of liability the federal government already has,” he said.

Sanford recommended to instead give states relief from unfunded mandates so that they have more options.

Most of the speakers placed emphasis on the need for more infrastructure investment for schools and education, citing the decline in quality of schools.

“With the frightening rise in mortgage foreclosures, schools are seeing record numbers of students who are homeless or poor enough to qualify for free school meals,” said Dennis Van Roekel, president of the National Education Association.

There was also discussion on more job creation and infrastructure investment.

October 29, 2008 | Permalink | User Comments (48) | TrackBack (0)

Gas Prices Drop Again

October 27, 2008 4:49 PM

ABC News' Charles Herman reports: The Energy Department reported Monday that retail gasoline prices dropped yet again as oil prices have plummeted. The latest government data shows that the average gallon of regular unleaded is now $2.66, down $0.26 from last week.

Since last month, the price has declined nearly 31 percent: On Sept. 15, the average price for a gallon of gasoline was $3.84.

But drivers are paying just 7.5 percent less per gallon today compared to a year ago, when the average gallon of regular unleaded cost $2.87.

For more information on gas price drops across the country, click on the chart below.

October 27, 2008 | Permalink | User Comments (49) | TrackBack (0)

Why Markets Crash in October

October 24, 2008 1:51 PM

ABC News’ Scott Mayerowitz reports: What is it with October?

Is it the changing seasons, the diminishing sunlight or maybe just a desire to be back on the beach?

Whatever it is, October has historically been a bad month for the stock market.

Today marks the anniversary of Black Thursday, the initial stock market crash in 1929 that eventually led to the Great Depression. (The two selloffs on Monday and Tuesday, Oct. 28, 1929 and Oct. 29, 1929, actually set off the panic.)

Then fast-forward to 1987. On Oct. 19 of that year, stock markets around the world crashed. On what became known as Black Monday, the Dow Jones Industrial Average lost 22.6 percent of its value.

Now to this October, as if anyone needs reminding. This month, the Dow has lost about 2,500 points, or 23 percent of its value amid a global financial crisis and economic slowdown. And there's still a week of trading to go.

So what is it about October?

“That’s a good question. It’s been asked before. Believe me, I don’t think I have an answer for you," Charles Geisst, a finance professor at Manhattan College, told me today. “I think it’s mostly coincidence."

Geisst, who has written several books about the markets, including “100 Years of Wall Street,” “Wall Street: A History” and “Undue Influence: How the Wall Street Elite Puts the Financial System at Risk,” thinks the Great Depression stigma might now perpetuate itself in some traders’ minds.

“The best I can say for it is that since 1929, there’s been a myth about October. And I think it’s more myth than anything else,” he said. “Maybe it’s Halloween or something approaching. I’m not sure. But it’s nothing serious. No.”

Well maybe history had some clues for us. After all, October was the month that the Great Fire of Chicago broke out in 1871. Hundreds were killed and another 90,000 were left homeless.

October was also the month -- in 1881 – when that most famous Western gunfights occurred: the shootout at the O.K. Corral.

Not that either of those events relates to the stock market and its gyrations.

So we then might have to turn to 1901, when on this day a 63-year-old schoolteacher named Annie Edson Taylor became the first on record to take the plunge over Niagara Falls in a barrel.

Plunge? Falls? A bit of a stretch? Probably, but it’s the best we could do.

It should be noted that October doesn’t always mean bad news for the stock market.

Look back just one year, when on Oct. 9, 2007 the Dow hit its all-time high close of 14,164.53, more than 40 percent above today's level.

October 24, 2008 | Permalink | User Comments (37) | TrackBack (0)

Boeing's Emergency Airplane Repair Team

October 24, 2008 10:27 AM

ABC News’ Matt Hosford reports that: Nothing fires me up like a good song.

My new favorite starts with a shredding guitar lick -- something you might have heard on college radio circa 1993. The vocals echo Les Claypool’s days in Primus.

And the lyrics, “Well, we’re toolin’ and a spoolin’ and a riggin and a jiggin” are straight out of the Mike Watt playbook.

Now what if I told you it was set to footage of guys fixing a plane? Sounds cool, huh?

The video is called “Put Together Quickly” and was produced by Boeing.

It shows the company’s Aircraft on Ground team fixing a damaged Boeing 767 airplane. That’s its job: When a plane needs repairs, it goes out and fixes it. Or as the team sings in its song, “We’ll come and fix any airplane, where it happens to be, we’ll get it in the air flying, where a plane ought to be.”

The AOG story -- and accompanying video -- are featured on the Air and Space Magazine Web site. The plane AOG fixed in the video had to be taken apart and reassembled all in three weeks.

Doesn’t sound like much of a challenge for a team that promises: “We fix it from the top, And we fix it from below, We get it done fast and put you on the go, Gotta beat feet, Just give me a good crane and safety helmet.” I know I’m fired up.

October 24, 2008 | Permalink | User Comments (1) | TrackBack (0)

Where Scared Wall Streeters Can Go: Church?

October 24, 2008 9:41 AM

ABC News’ Alice Gomstyn reports: Traders and other financial types looking for relief from all the economic and market turmoil in recent weeks haven’t had to venture far from their Wall Street stomping grounds. Since last month, a New York City church blocks away from the New York Stock Exchange has recently started offering sessions geared to those suffering from the financial crisis.

Trinity Church, in cooperation with the Psychotherapy and Spirituality Institute, has offered sessions on coping with stress as well as “navigating career transitions,” which offers guidance to those who have lost their jobs or fear for their job security.

“The thing that I hear most frequently is this is scary,” said psychologist Mary Ragan, who leads the stress counseling sessions. “There is a sense of helplessness. … These seminars are really focusing on helping people to understand where they do have control.”

Despite the church’s proximity to Wall Street, Ragan indicated that Wall Street suits are not necessarily the target audience.

“There certainly are some people who are financially sophisticated, but there are lots of other people who are coming to these seminars who are not,” she said. “We’ve had retirees on a fixed income. We’ve had people in the neighborhood.”

Among the more surprising visitors: foreign tourists.

“I would say in almost every seminar I’ve done, there’s been somebody from Europe or in one case India who was here on holiday who saw the sign and came,” Ragan said. “One woman actually was running a small business in Ireland and under pretty significant stress.”

For some foreigners, she said, “there may simply be a curiosity factor: ‘What are these Americans going through?’”

The sessions have drawn anywhere from just a handful of people to more than 20.

I recently checked out a daytime career counseling session led by Michael Bednarski of the Psychotherapy and Spirituality Institute. Just one other person came.

Bednarski told me afterward that the daytime session may have been less convenient to attend than the nighttime ones.

But, he said, he expects more people will come out soon.

“We’re not yet officially in a recession,” he said. Once a recession is official, he said, “I think you’re going to see these rooms fill up.”

October 24, 2008 | Permalink | User Comments (11) | TrackBack (0)

Searching for a Home ... and a Mortgage

October 23, 2008 5:00 AM

ABC News’ Alice Gomstyn reports: In an era of plummeting home values and skyrocketing foreclosure rates, it’s a scary time to be a homeowner.

But Nancy Nichols still wants to be one.

Nichols, a single mother of two who rents a home in Cheyenne, Wyo., has been waiting for three years to buy a house. A math teacher at a community college, Nichols says her wait might be ending.

“With the housing market being down, I know I could get a lot more house now for my money than I could have two or three years ago,” she said.

If there’s a silver lining to today’s housing crisis, it’s for people like Nichols. Home prices saw their biggest drop in nine years recently -- the median price for a single family home in the U.S. in August was $203,100, down more than 9 percent from the year before.

The lower prices make it easier for Nichols and others to find the homes that meet their needs. For Nichols, 42, that includes staying in Cheyenne --  where her kids are in school  --  and finding more space.   

“There’s not even enough room in the bathroom for more than one person to even stand there,” she said. “Since it’s a rental unit, it’s not like I can hire somebody to put another bathroom in the basement.”

Not that would-be homebuyers like Nichols, pictured below, have it easy. Borrowers have fewer options than before because some lenders have gone out of business since the start of the housing slump. Those who are offering loans have tightened their lending standards –- they often require higher down payments and borrowers typically must have credit scores of 720 or higher to qualify for the lowest interest rates on a home loan.

Nichols, who earns about $50,000 a year through her community college job and other teaching work, said her credit suffered after her divorce  --  it was tough to pay some bills on time.

“That’s one reason that I’ve waited this long  --  I was trying to rebuild my credit,” she said.

Her score today, she said, is at 700. She said she expects it to rise soon, but she’s still nervous.

“I’ve heard such bad stories ... people were talked into taking out loans that they really couldn’t afford,” she said. “That’s one of my big fears.”

For now, Nichols is on the hunt for a mortgage broker. She hopes to find a real estate agent soon too.   

“I was thinking I’ll probably wait till the economy calms down a little bit -- I think right now everybody’s so panicked, I’m not sure right now is a good time to do it,” she said of her real estate agent  search. “Maybe in another month or so.”

We’ll check in with Nichols in a few weeks to see how she’s doing. Stay tuned.

October 23, 2008 | Permalink | User Comments (34) | TrackBack (0)

Will GM Seek Cash from the UAW?

October 21, 2008 7:00 AM

ABC News' Alice Gomstyn reports: There are signs that the credit market is thawing, but that doesn’t mean it will be easy for General Motors to get the cash it needs to finance a merger with Chrysler.

“We can’t finance consumer car loans for now, so how they will find the financing for this,  I don’t know,” said Kristin Dziczek, the senior project manager of the Economics and Business Group at the Center for Automotive Research.

The Wall Street Journal, citing unnamed sources, reported Monday that GM has had trouble attracting investors, despite the automaker’s pitch that a merger would help the combined company save as much as $10 billion. (Neither GM nor Chrysler have confirmed that they are in merger talks.)

Some of the savings, presumably, would come from job cuts, but Dziczek said that GM would also need money to fund severance packages for the workers who lose their jobs. In addition, she said, GM may need money to defend itself from litigation: if a GM-Chrysler merger results in the discontinuation of certain auto brands, dealers who sell those brands may sue.

Exactly where might GM go to secure the funds it needs? Dziczek suggested a surprising source  --  the United Auto Workers. Starting in 2010, the union is supposed to receive billions from GM and Chrysler to fund retiree health care. If GM is late on its payments, she said, it would have to pay a 9 percent interest rate.

If GM delays its payments and later pays the 9 percent rate, Dziczek said, the company would, in effect, be borrowing from itself at a lower rate than it could ever find at a bank.

Of course, such an arrangement would need the UAW’s blessing, and there’s the catch: The UAW has already come out against a merger. If the union changed its mind and agreed to not only support the merger but also to help finance it, GM might have to scale down on merger-related job cuts.

For example, the UAW likely won’t agree to help if the merger “wipes out all the Chrysler workers,” Dziczek said.

There is another financing option: the government.

Last month, Congress approved $25 billion in low-cost loans for the auto industry. Dziczek said she wasn’t ruling out the possibility that there’d be more in the way of such aid.

But Michigan Rep. Thaddeus McCotter, whose district includes many auto industry employees, said the government won’t step in to the help aid the merger unless it’s asked   …and no one’s asked yet.

“It would be imprudent for the federal government to try to stick its nose into these merger talks if the parties have not made any reference to the federal government coming in,” he said.

October 21, 2008 | Permalink | User Comments (35) | TrackBack (0)

Relief for Your Tank: Gas Prices Drop Again

October 20, 2008 5:48 PM

ABC News’ Dan Arnall reports: The Energy Department reports that retail gasoline prices have had another week of steep price drops. The newest government data shows that the average gallon of regular unleaded is now going for $2.91, down $0.24 from the previous week.

In the past two weeks, consumers have seen prices drop by $0.57, the largest two-week price drop in the history of the government report. It’s the first time since early February that prices have been below the $3 a gallon mark.

With this quick drop in prices consumers are spending just 3 percent more per gallon today when compared to a year ago, when they were paying $2.82.

Consumers in the Midwest region are actually paying LESS per gallon today than they were a year ago –-
two cents less to be exact. For more on the gas prices changes around the country, click on the chart below.

October 20, 2008 | Permalink | User Comments (45) | TrackBack (0)

Government’s Plan to Invest Billions in Banks

October 20, 2008 2:46 PM

ABC News’ Kirit Radia reports: Treasury Secretary Henry Paulson this morning provided the latest details of the government’s $700 billion bailout plan. The government is going to offer $250 billion to U.S. banks, which, as an industry, have been hammered by the housing market collapse.

The government will take ownership shares in the banks through preferred shares. Any bank that agrees to participate will be subject to certain conditions, including limits on executive compensation.

Here are some points federal regulators made to ABC News about the plan.

What Is the Deadline for Banks to Act?

The banks must submit initial applications by Nov. 14 but could be given a few extra days if needed. Federal regulators will then recommend to the Treasury Department whether to put government funds into that bank or not. That said, the government hopes to start this as soon as possible, and if the bank is approved before then, won't wait until the deadline to make its first purchases.

What Would Get a Bank Rejected From the Program?

Officials were reluctant to provide details on what might be grounds for rejection, trying not to tip their hand. They said they want the program to be "broad-based" and to reach as many banks as possible.

They insisted there would be enough money in the $250 billion allocated for the program to be able to invest in all the banks that are interested.

One regulator said that they do have a list of "problem banks" but wouldn't elaborate on which banks made the list, or how that might affect an application for federal funds.

Why Would Banks in Good Standing Subject Themselves to Restrictions to Get This Money?

The regulators insisted this is a good investment for the banks, saying the government was offering them "attractive capital."

The regulators said they have already received significant interest in the program from several banks.

Why Would the Banks Use This Money to Make Loans Rather Than Hold Onto It?

The officials said they are confident that banks have high-quality loans they want to make, if only they had the extra capital, and would likely make these desired loans with government funds, as it would be the fastest way to get return on investment.

So What Happens to This Program When the New Administration Comes In?

They acknowledged that there may be a need to "unwind" the program and said that there will be talks about this when the program gets up and running.

They insisted the new administration will have the ability to refine the program if it so desires.

October 20, 2008 | Permalink | User Comments (31) | TrackBack (0)

A Stock Market Cease-Fire

October 15, 2008 10:10 AM

ABC News' Betsy Stark reports: The furious financial-policy diplomacy of the last week has produced what feels like a cease-fire in the financial markets. Overseas, stocks are trading lower. Here in the United States, they opened lower as well.  But we can live with that after so many mornings of waking up to the news that they were in free fall or ready to plunge at the open.

To borrow the medical metaphor, policymakers have stopped the bleeding. We are no longer witnessing a bank a day fail. But if the patient is out of the emergency room, it still requires intensive care and should anticipate a long recovery. The "real economy"-- not to be confused with the financial system governments have been working overtime to save -- has deteriorated during this crisis. It may take more fiscal stimulus from Congress and more interest rate cuts from the Federal Reserve to revive the economy as we move forward.

For now, success will be measured by a different yardstick. The good news today is that the massive capital infusion by the federal government into the nation's banking system, which should begin later this week, is likely to shore up bank balance sheets and public confidence in their balance sheets. LIBOR rates--the rate at which banks make short-term loans to each other and a bellwether of the health of the credit markets -- have inched down a notch. These are positive developments in a system where the flow of credit was frozen and there were paralyzing questions about the solvency of major financial institutions.

But if Rescue 2.0 is already showing signs of being good for banks, it will take a little longer before we know what it does for other sectors of the economy and for the man and woman on the street. Will credit start flowing soon enough and cheaply enough to keep the U.S. auto industry afloat? How far off is the kind of relief that could help the housing market? Rates on 30-year fixed rate mortgages actually inched up in the last week.  And what will the massive cleanup of bank balance sheets do to the balance sheet of the United States of America? Estimates of the new potential price tag have risen from $700 billion for Rescue 1.0 to $2 trillion to $3 trillion for Rescue 2.0.

The fever may have broken, but the patient requires serious ongoing supervision. Or, if you prefer sports metaphors, I heard one analyst say recently: "My best guess is we're in the fifth or sixth inning of this game. But it could turn out to be a double-header."

October 15, 2008 | Permalink | User Comments (3) | TrackBack (0)

Recue Plan 2.0: Brown Knows Best?

October 13, 2008 9:49 AM

ABC News’ Betsy Stark reports: Call it Rescue Plan 2.0, the Global Bailout. In Madison Avenue terms, it’s New and Improved and Extra Strength. The worst week in Wall Street history has had a sobering effect on government leaders around the world, who weren't exactly slacking off before the sky fell on global financial markets. But they really mean business now and judging from the positive reaction in financial markets this morning, investors are beginning to believe.

Rescue 2.0 might also be dubbed the British Plan. Last week Prime Minister Gordon Brown announced a strategy some private economists here were urging, reportedly along with Ben Bernanke, to inject capital directly into banks, rather than buy their bad assets, as the Paulson plan directs. The idea is that a direct capital infusion is the fastest way to shore up weak balance sheets and make sure banks have enough cash to get back in the business of lending to cash-starved clients. And the bonus for taxpayers is a preferred equity stake in these banks in exchange for this cash aid.

But in the face of the worst week in Wall Street history, there were fears that might not even be enough to jump-start that market we can't see but that is still at the heart of this crisis: the credit markets. So there's expected to be another new feature to Rescue 2.0: government guarantees of inter-bank lending. Sounds very technical but the idea is this: Credit is the lifeblood of the global economy and it won't flow if big banks don’t open their spigots to each other, fearful that their counterparties won't be around to pay back the loan. These routine short-term loans are so vital to the global economy that governments are now saying: We'll guarantee you big banks that you'll get paid back… so LEND!  This is designed to get those critical LIBOR rates down to more normal levels. By the way, whose bright idea was this? Another shout out to the British, who announced their intention to do this in the United Kingdom late last week.

The bottom line here is that in the face of global financial markets in free fall and a brewing global recession, policymakers have upped the ante considerably. And they have taken major steps toward coordinated intervention even as they tend to their own backyards. They understand that in a global financial system, where huge sums of money can move at the stroke of a key, one country can't have a far better bailout plan than another or investors will flee with their money to the nation with the best guarantees. That would be hugely damaging and destabilizing.

These are bold measures. They are taken mindful of what happened in the 1930s when central bankers and government leaders sat back and let events unfold. No one is saying we're out of the woods, but investors have reason to be hopeful.   

October 13, 2008 | Permalink | User Comments (40) | TrackBack (0)

Wall Street's Wild Week

October 10, 2008 8:07 PM

ABC News’ Charles Herman reports: One of the worst weeks in the history of the Dow ended on a slightly positive note Friday as stocks rallied in the last hour of trading to claim some minor victories.  At one point, the Dow Jones was up as much as 273 points.

But in the end, the Dow lost only (only!) lost 128 points to close at 8,451.19 (-1.49%) after a day where it dropped as low as 665 points within seven minutes of the opening bell trading below 8,000 points. 

The Nasdaq ended seven losing days to close up (up!) 4.39 points to close at 1,649.51 (-0.27%).  And the S&P 500 lost just 10.70 points to close at 899.22 (-1.18%).

Earlier this morning, it looked as if the day would take the title “Black Friday” even before the market opened.  A horrendous day of trading overseas where markets plunged dramatically led stock watchers to fear the how the week would end.

“It was a very bad week about as bad as its ever been,” said Mark Zandi, chief economist with Moody’s Economy.com.  “The sky really did fall this week”

Nearly an hour after the markets opened, President Bush addressed the nation trying to comfort Main Street.  “The federal government has a comprehensive strategy and the tools necessary to address the challenges in our economy,” he said at the White House.  “Fellow citizens: We can solve this crisis -- and we will.”

But Wall Street took little comfort in his words.  The Dow was down 78.70 points as the President began to speak and ended down 185.66 points when he finished.

Later in the day, the White House denied the President was trying to impact stock markets.

“We're not going to be able to snap our fingers and get our way out of this problem,” said White House spokesperson Dana Perino.  “The remarks this morning were never billed as a panacea to make the markets go up. We don't try to affect daily market movements. What we're trying to do is stop the bleeding, strengthen the markets, return it to -- return people's confidence.”

It’s the lack of confidence that has been the source of pessimism and fear that has resulted in the Dow losing 1,874.19 points this week, more than 18%.

“You’re seeing social psychology play out on a grand stage here,” said Stephen Leeb, chairman of the investment committee at Leeb Capital Management. “Basically, its fear feeding on fear feeding on fear.  The intensity and unrelenting selling is unlike anything we have seen.”

Despite globally coordinated interest rate cuts, massive injections of money, promises of billions of dollars to buy toxic mortgage assets, increases in insured bank deposits and practically a blank check for the nation’s businesses to obtain necessary short term loans, it still was not enough to get credit markets moving this week.

On Monday, the Dow closed at 9,955.50, losing 369.88 points (-3.58%) despite the approval of the $700 Billion TARP the previous Friday and the early morning announcement that the Federal Reserve will pay interest payments on bank reserves and announces it will inject more money into the financial system

Tuesday was even worse as the Dow lost 508.39 points or 5.11% to close at 9447.11 even though the Federal Reserve said it would get into the business of providing short-term loans necessary for businesses for things like paying employees or buying supplies. 

Also on that day, the FDIC officially announced that as of last Friday, insurance on bank deposits would rise to $250,000 from $100,000 for each depositor. 

And at the lunchtime hour, Federal Reserve Chairman Ben Bernanke spoke to a group of business economists and told them that the “outlook for economic growth has worsened.” 

But in the end, the sell-off kicked off around 2:25pm.

Wednesday the Dow closed down at 9,258.10, down 189.01 (-2.00%), even though the Federal Reserve, in conjunction with five central banks around the world, cut the key federal funds interest rate by a half a percent to 1.5%. 

Later that day, Secretary Paulson spoke about the current conditions calling for patience.  “The turmoil will not end quickly and significant challenges remain ahead.”   

And again, the sell-off kicked off at 3:30 just as Paulson finished.

On Thursday - the index lost 678.91 to close at 8,579.19 (-7.33%).  And with no major announcement, despite rumors that the Treasury Department was considering providing money directly to banks in order to get them lending money, the big sell off started in earnest at 2:59pm.

"People lost faith in every aspect of the financial system from the stock market to municipal bonds to their own deposit account,” said Zandi.  “So that loss of faith is something never seen.

That lack of faith was clearest this week as financial institutions can only watch as their stocks get hammered.  Continued worries about the future of the nation’s second largest investment bank Morgan Stanley led to its stock to drop 22% to close at 9.68.

But the severe drop in the markets led investors to run for the door, throw the baby out with the bathwater, sell first and asked questions later, throw in the towel, chose your expression. 

In other words, solid businesses had to cope with falling stocks as well.  Kellogg’s stock closed at 48.49, down more than 13% from its close on Monday.  Procter and Gamble closed at 59.56, down more than 13 percent from Monday’s close.

“I haven’t seen anything like it in my life and I’ve seen an awful lot in my life,” said Hugh Johnson, investment strategist with Johnson Illington Advisors. “I saw the bear markets of 1974 the devastation of 1982 the crash of 1987. I’ve really never seen anything like what we’ve seen this week.”

But Friday’s better-than-expected close could give hope to optimists and those searching for the bottom.

“The most horrific decline in certainly anyone’s memory and possibly in history could turn very quickly into being a very dramatic increase in stock price,” Leeb said. “This is not the time to give up.”

That possible rebound in stock prices could only come too soon after millions of Americans saw their savings wiped away in only a few days. 

“It's like 10 yrs of saving is now completely gone, vanished.  Poof!”  Mark Zandi said. 

And the damage that has done to companies such as General Motors (up 2.73% from a disastrous drop on Thursday) will reverberate throughout the nation’s economy on Main Street where we live, no matter how much the markets regain from their tremendous losses.

“The economic pain is going to be quite significant,” said Zandi. “Certainly, over the next 6 months, we're going to see hundreds of thousands lose their jobs as businesses pare back their payrolls and there will be a significant increase in the number of business bankruptcies.”

“We'll see people struggling to stay in their homes, make their bills and its going to be a really tough time for most of us for many of us into next year. 

But several veteran market watchers had hope after today’s close.  “I think the common thing about Bear markets is that it ends,” said Johnson.  “All have to recover.”

And with billions of dollars soon to flood the financial system and restart the frozen credit markets, the end could be in sight. 

As Johnson put it, “Hang on.”

October 10, 2008 | Permalink | User Comments (24) | TrackBack (0)

Will Morgan Stanley Survive the Weekend?

October 10, 2008 4:03 PM

ABC NEWS' Zunaira Zaki reports: Will Wall Street heavyweight Morgan Stanley survive the weekend?

Shares for Morgan Stanley, a storied investment bank which recently converted itself into a commercial bank, dropped into the single digits in trading today as investors speculated on its future.

"Morgan Stanley is getting thrown out with the bathwater," said Ada Lee, an analyst with Sterne Agee brokerage. Investors refused to be reassured despite a statement from Japanese bank Mitsubishi UFJ today that it will not renege on a promised $9 billion investment.

Monday is a bank holiday in both the United States and Japan, delaying a completion of the transaction between Morgan and Mitsubishi, further exacerbating the uncertainty surrounding Morgan stock.

The speculation surrounding Morgan is oddly reminiscent of the aura around Lehman Brothers before it filed for bankruptcy. The Friday before Lehman declared bankruptcy, speculation regarding the bank's future was at a fever pitch. Come Monday, Sept. 15, Lehman Brothers filed for bankruptcy in New York.

Banking analyst Dick Bove of Landenberg Thallman said, "I hope I am dead wrong," but "Morgan does not survive this weekend." He added however, that if people did “normal business” with the company the problem would go away, but the markets are "consumed by fear."

Bove said that Morgan may be acquired by either Citigroup or Mitsubishi UFJ. Analyst Sean Ryan of Sterne Agee disagreed, saying that Citigroup is "constrained in its ability to conduct a transaction of that size."

As the Wall Street Journal said today, "The sharks are circling closer to Morgan Stanley."

October 10, 2008 | Permalink | User Comments (40) | TrackBack (0)

The Stock Market Crash of 2008

October 10, 2008 10:03 AM

ABC News’ Betsy Stark reports: In 1987, it happened in a day. In 1929 it happened in two days. Now it has happened in seven days, but the result is same. The stock market has crashed.

The technical definition of a crash is a precipitous decline of 20 percent. That's how far the Dow Jones industrial average has plunged in the last seven trading days. Markets around the world have followed suit, guilty of the same over-leveraging and exposed to many of the same bad bets. This is what a global bear market feels like.

The professionals say the panic-selling and naked fear are signs that a bottom to this agony could be near. But no one knows for sure.

Individuals and institutions are bailing out of stocks for the safety of savings and checking accounts, treasury bills and gold. The end of the ban on short-selling Thursday may be a factor at play, allowing big investors once again to bet against stocks going up. And hedge funds and mutual funds alike are being forced to sell their investments in good companies -- adding fuel to this global wildfire -- as margin calls multiply and growing numbers of customers seek redemptions in this meltdown.

Investors remain skeptical about the ability of the various bailout plans to work. AIG burned through $85 billion in two weeks. The Federal Reserve announced it was willing to lend directly to companies unable to get loans in the commercial paper market and the result so far is fewer loans at higher rates. The lack of trust among counterparties continues.

The weeks-long process -- now beginning -- of trying to find a fair price for the bad assets on bank balance sheets has kept banks on edge. Until they know how much they can sell those assets for, they won't know whether the sale of those assets will make them weaker or stronger. Ironically, the $700 billion TARP plan seems to be perpetuating the freeze in the credit markets rather than thawing it. That's one reason Treasury Secretary Henry Paulson is now talking about doing what the British have done, which is make direct investments in big banks in return for equity stakes for the taxpayer.

But this is not just a market event. The impact on the "real economy" -- the one we live and work in -- will grow deeper the longer the crisis goes on. The Wall Street Journal estimates today that investors have lost $8.4 trillion in wealth in the past year. We are already seeing the consequences of that. As consumers hunker down, consumer companies will suffer. Look no further than General Motors.

This weekend finance ministers will meet in Washington to talk global strategy. With global markets crashing in lock-step, they will need to come up with some answers. But if they cannot or do not, will the bottom keep falling out from under? Judging from what happened in Asia overnight, what's happening now in Europe and the grim signs of another sell-off on Wall Street today, investors are not waiting to find out.

October 10, 2008 | Permalink | User Comments (50) | TrackBack (0)

Wall Street’s Tailspin

October 09, 2008 8:05 PM

ABC News’ Charles Herman reports: Fear gripped Wall Street in the last hours of trading as stock markets plummeted despite spending most of the day slightly above or below the opening.

“When have stocks going down more then 2% a day for seven days in a row, that's a panic and that's a crash,” said Art Hogan, market analyst with Jeffries & Co.  “You can call it anything you like but its still a historic sell off and one that we've never seen before.”

The huge sell-off in the final moments was led in part by the 31% drop in General Motors –- a Dow component -– after the ratings agency Standard and Poor’s put the car company and its financing affiliate under review for a possible downgrade.  That would make it harder and more expensive for the nation’s largest automaker to get needed loans.

The news could not be worse for the struggling automaker as earlier in the day, an auto forecasting firm said it could foresee an “outright collapse” in 2009 in the global auto industry due to the crisis in financial markets and the possible downturn in the global economy.

Led by General Motors, all 30 members of the Dow Jones saw their stocks drop as the index lost 678.91 to close at 8,579.19 (-7.33%). General Motors stock dropped to its lowest in 58 years according to Bloomberg and Ford hit a 26-year low.

Today marks the one-year anniversary of the Dow reaching its all time high of 14,164.53.  With today’s close, the Dow has now lost nearly 40% since that record.  It has dropped 5585.34 points, or -39.43%.

It was the first time the Dow closed below 9,000 since June 30, 2003.  It is the worst bear market since the January 1973-December 1974 bear market, when the DJIA fell 45% from its peak to its trough.  Additionally, it is the largest seven-day percentage decline since October 26, 1987 and the lowest closing value since May 21, 2003.

Other indices also suffered today.  The Nasdaq lost 95.21 to close at 1,645.12 (-5.47%) and the S&P 500 lost 75.08 to close at 909.9 2(-7.62%).

So in addition to investors worrying about the survival of financial institutions and insurance companies, they can now add the auto industry to their list.  And like troubled banks, the auto industry has also received help from the government. In the recently approved budget to fund the government, Congress provided the industry with $7.5 billion to fund a $25 billion loan program.

But even more remarkable has beem the huge sell-off at the end of the day which has occurred the past three days as the closing bell draws closer.

TUESDAY: Sell off started at around 2:25pm ET (-2.5%)

WEDNESDAY: Sell off started at around 3:30pm ET (-3.3%)

THURSDAY: Sell off started at 2:59pm ET (-5.5%)

This could be in due in large part to when trades of hedge funds and mutual funds are executed. 

The $2.6 trillion overleveraged hedge fund industry can be forced to sell at the end of the day to cover losses. The average returns for hedge fund returns fell nearly 5% last month and this marks the biggest loss in 10 years. For the year, hedge fund average returns are down nearly 10%.

There could also be a veritable “run on the mutual fund” as average Americans, perhaps panicked to see their investments dramatically drop in value, have hit the sell button. 

“It's a reflection of how much mutual funds have to raise in terms of redemption,” said Hogan about the last minute selling of stocks.  “That means people are selling mutual funds, the mutual funds are selling stocks, and unfortunately that becomes very self fulfilling.”

In the two weeks ending September 22, approximately $185 billion has been pulled out of mutual funds and put into checking and savings accounts, including CDs, according to TrimTabs.  In the prior four months, $40 billion was pulled out and put into the traditional bank accounts.

On top of this, credit markets continue to remain constricted, even after aggressive steps taken by central banks around the world to cut interest rates.  There were signs today that the Treasury Department is considering making direct cash payments to banks in return for some form of shares of the bank in order to give banks more money so they begin to lend once again.

“If the banks and the markets aren’t performing their financial intermediary function, corporations and other businesses can’t fund their day-to-day activities,” said Doug Pate, market strategist with J.W. Seligman.

But perhaps in all this panic, there could be a measure of hoped-for-calm to come soon "When emotions totally rule the decisions,” said Sam Stovall, Chief Investment Strategist with S&P Equity Research, “that usually is the sign that we’re getting close the bottom.”

Dow Jones Industrial Average

Today is the 1-year anniversary for the DJIA of its peak and the six year anniversary from its last bear market low.

As of October 9, 2008

         The DJIA, down 678.91 points, or -7.33%, to close at 8579.19.

         First time closing below 9,000 since June 30, 2003.

         Closed at its lowest level of the day.  The last time the DJIA had an intra-day low below 9,000 was on August 6, 2003.

         Worst bear market since the January 1973-December 1974 bear market, when the DJIA fell 45% from its peak to its trough.

         Down for the seventh consecutive trading day and eight of the last nine.

         Down 2271.47 points, or 20.9%, over the last seven trading days.

         Largest seven-day point decline in its history.

         Largest seven-day percentage decline since October 26, 1987.

         Longest losing streak since the seven day decline that ended on July 16, 2002.

         Lowest intra-day level since May 27, 2003.  The last time the DJIA had an intra-day level below 9,000 was on August 6, 2003.

         Lowest closing value since May 21, 2003.

         Largest one-day point decline since September 29.

         Largest one-day percentage decline since October 26, 1987.

         It has dropped 5585.34 points, or -39.43%, from its record close of 14164.53, hit on October 9, 2007.

         It has dropped -34.30% from its 2008 close high of 13058.20, hit on May 2.

         Month-to-date, the DJIA is down -20.93%. In September, it closed down 6.00%.

         Year-to-date, it is down -35.32%.

         Off 38.8% from 52 weeks ago.

October 9, 2008 | Permalink | User Comments (48) | TrackBack (0)

Watch the Hedge Funds

October 08, 2008 10:47 AM

ABC News’ Bianna Golodryga reports: What's behind these huge market swings? Pay attention to who’s driving the action. One major industry to look at -- hedge funds.

 

It is a $2.6 trillion industry and it’s not rich "fat cats" money. Pension funds are major clients as well. Hedge funds are in a tough bind right now. As one major fund manager said when futures were reacting positively to news of the rate cut this morning, "Today not a soul is expecting a market turn to hold."

 

Hedge funds are at their lowest level in more than 20 years. Most hedge funds have been facing frantic massive redemption from clients during the last three months and are being forced to sell what had been winners. Big commodity-based companies -- those that have seen huge spikes in stock values -- are taking massive hits on renewed concerns of a global slowdown.

 

Hedge fund average returns fell nearly 5 percent last month -- the biggest loss in 10 years. Year to date, they are down nearly 10 percent. Most of these managers charge a high fee, 2 percent annual management fee, a 20 percent cut for any profits. Seeing as they have only 2 1/2 months left in the year to prove themselves, the clock is ticking. One analyst predicts that 10 percent of the 10,000 hedge funds in business may be gone by early next year due to investor liquidation.

 

This morning they were carefully watching the market's reaction to news of the rate cut. Had they seen a sustainable positive response, they would have been covering their bets. Because the underlying view was that this rate cut did not have legs, hedge fund investors turned back toward their redemption spree. If they sense a turn in sentiment, they will start covering up their shorts as quickly as they sold them off. Their actions will likely be quick, fast and seemingly irrational.

October 8, 2008 | Permalink | User Comments (6) | TrackBack (0)

Will Rate Cuts Calm World Markets?

October 08, 2008 8:39 AM

ABC News’ Betsy Stark reports: Another day, another meltdown, another historic response by policymakers.

Will this morning's coordinated global interest rate cut stop the panic selling in financial markets around the world? The immediate reaction was positive but can it hold? That's a tall order right now. Fear is pervasive and the facts are pretty bad, too.

While you were sleeping, Asian markets went into a tailspin. Japan's Nikkei recorded its worst one-day drop -- almost 10 percent -- since the stock market crash of 1987. The bloodletting continued in Europe, despite the announcement of an extraordinary financial rescue plan by the U.K. government. British Prime Minister Gordon Brown called the bank bailout plan -- worth close to $1 trillion in direct loans and guarantees -- more "comprehensive" than the measures taken in the United States.

Elsewhere on the globe, Iceland is trying to avoid national bankruptcy with an emergency loan from Russia. But Russia's stock market has been in such steep free fall, trading there has been suspended until Friday.

Despite aggressive, inventive and massive interventions by the government in financial markets, investors are in panic mode. What should be working to allay fears and restore confidence is not. Some market analysts say it's a sign that the bottom of this terrifying plunge could be near.

But for now, a vicious cycle has taken hold: The worse the financial crisis grows, the more it harms the economy, the worse the financial crisis grows.

Consider the vicious cycle at work in the credit markets. The Federal Reserve steps in to say it will lend directly to big companies that can't get short-term financing for payroll and inventories in the commercial paper market. That's after setting up a special credit line of nearly $1 trillion -- a "liquidity backstop" -- to encourage banks to lend.

But banks are still not lending. Lending rates have still not come down. Why?

It's not just that banks are fearful that their counterparts will not be able to pay them back -- even when they're the size of General Electric, Toyota and American Express. Banks are also hoarding cash because in such treacherous times, businesses stay afloat by drawing down long-standing lines of credit they have with banks. And if banks signal they no longer have the cash to honor those lines of credit, there will be real risk of a run on the bank.

The shutdown in lending, in turn, means businesses are starved for capital. They postpone all but the most vital expenditures. But if sales and profits decline, eventually companies will look for other ways to save money. That's when unemployment rises. If unemployment rises, consumers hunker down even more. That causes the economy to slow. If it slows enough, some businesses will fail. If more businesses appear to be at risk of failure, banks will be more fearful of lending to them. This is what a vicious cycle looks like.

Is there anything that can break this vicious cycle? The talk in the markets has been about the need for a coordinated global response to this global financial crisis. The thinking is that with financial institutions around the world so interconnected and so collectively exposed to risk, the most effective fix is not a piecemeal approach, country by country, but a coordinated one.

The markets now have what they have been saying they wanted. We will soon see whether it's enough.

October 8, 2008 | Permalink | User Comments (5) | TrackBack (0)

Fed Chairman Gets Standing Ovation

October 07, 2008 5:50 PM

ABC News’ Daniel Arnall reports: Fed Chairman Ben Bernanke addressed the 50th annual gathering of the National Association of Business Economics today, getting a standing ovation before he began his prepared remarks.

Bernanke, whose team at the Fed has been working overtime coming up with novel responses to a growing, global economic meltdown, received generally good reviews from most of the 400 or so economists in attendance.

"As you know, financial systems in the United States and in much of the rest of the world are under extraordinary stress, particularly the credit and money markets," Bernanke said in his prepared remarks. "The losses suffered by many banks and non-bank financial firms have both constrained their ability to lend and reduced the willingness of other market participants to deal with them."

The Fed Chairman went on to explain the importance of the recent changes in the government's toolbox to deal with distressed financial markets and the overall economy. He also said the economy continues to face major problems beyond the immediate credit issues.

Growth, according to Bernanke, is likely to be subdued for the rest of 2008 and into early 2009.

His next comments were interpreted by professional Fed Watcher as an indication that there might be some rate cuts in the next few months. "In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate."

The brief question and answer session from the conference attendees didn't yield any news. Bernanke's boldness -- in actions if not words -- gave the Chairman a rock star-like appeal to this audience of business people hoping for something to turn things around.

"These are momentous steps, but they are being taken to address a problem of historic dimensions," said Bernanke about the actions of the past few months. "In one respect, however, we are fortunate. We have learned from historical experience with severe financial crises that if government intervention comes only at a point at which many or most financial institutions are insolvent or nearly so, the costs of restoring the system are greatly increased. This is not the situation we face today."

Click here to read the full speech text.

October 7, 2008 | Permalink | User Comments (4) | TrackBack (0)

Preventing a Crash: When Stocks Stop Trading

October 06, 2008 11:47 AM

ABC News’ Charles Herman and Dan Arnall report: It's unlikely that we’ll see the stock market triggering so-called “circuit breakers,” but just in case, here is a primer on what we can expect if there is a massive decline in the value of stocks.

After the stock market crashes of October 1987 and 1989, the New York Stock Exchange instituted a rule -- called Rule 80b -- that provided for a stop to trading should there be a rapid and significant drop in the market.

Each quarter, the NYSE publishes circuit-breaker levels at 10 percent and 20 percent of the average value of the Dow from the previous month. If the market drops beyond these points, trading stops for a specified time according to the time of day that the drop occurred. There are no “upside” circuit breakers.

Here’s a look at the current circuit-breaker levels for the NSYE:

In the event of a 1,100-point decline in the Dow Jones industrial average (10 percent) before 2 p.m., there would be a one-hour halt. If the drop happens between 2 p.m. and 2:30 p.m., there would be a 30-minute halt, and after 2:30 p.m., there would be no halt in trading.

If there was a 2,200-point, or 20 percent, decline, before 1 p.m., there would be a two-hour halt in trading. Between 1 p.m. and 2 p.m., there would be a one-hour halt. And if such a drop happened after 2 p.m., the market would close for the day. (The market normally closes at 4 p.m.)

In the event of a 3,300-point, or 30 percent drop, the market closes for the day regardless of time.

Rule 80b has only been used once -- on Oct.  27, 1997. On that day the Dow was down 350 at 2:35 p.m. and 550 at 3:30 p.m., shutting the market for the remainder of the day. Obviously, the trigger points were much lower at that time because the value of the Dow was much lower.

October 6, 2008 | Permalink | User Comments (40) | TrackBack (0)

Jobs Down 150K -- Why Is the Market Up?

October 03, 2008 9:28 AM

ABC News’ Betsy Stark reports: It’s a recessionary number and worse than expected, but the stock market futures strangely improved despite the news that U.S. employers shed 159,000 jobs last month. The total number of jobs lost since the beginning of the year is now more than 750,000 positions.

Analysts are saying this counterintuitive reaction may be signaling that the market is expecting a cut in the Federal Reserve’s key Fed Funds rate -- possibly as early as today if the House fails to pass the rescue plan approved by the Senate Wednesday.

That's still a bit baffling because the problem in this credit crisis lies not where the Fed has set rates but in the breakdown in confidence that is freezing the flow of credit and keeping market lending rates high.

--With reports by ABC News’ Dan Arnall.

October 3, 2008 | Permalink | User Comments (22) | TrackBack (0)

Mayor Bloomberg Channels Carly Simon

October 02, 2008 6:39 PM

ABC News’ Charles Herman reports: Citing “unprecedented challenges” confronting the nation’s economy, two-time New York city Mayor Michael Bloomberg announced he would seek a third term, despite voter approved term-limit laws.

“My whole life has prepared me for the challenges ahead, and I want to give the voters a chance to decide if they want me at the helm. If voters don’t like what they’ve seen, they will vote for someone else and that’s as it should be,” he said at a press conference timed to start as local television stations being airing their noon news programs.

Bloomberg said the City Council could change the law to allow him to run again.

“Given the events of recent weeks and given the enormous challenges we face, I don’t want to walk away from a city I feel I can help lead through these tough times

Addressing the financial stabilization bill that's being considered in Washington, the billionaire businessman turned bureaucrat said the “$700 billion bailout is not a magic bullet; it’s a badly needed, short-term, stop-gap measure, but it will by no means make all our problems disappear.”

He also warned New Yorkers that the impact from the credit crunch would affect the city but was optimistic. “The good news is we have planned for a slowdown in New York, but we may well be on the verge of a meltdown, and it’s up to us to rise to the occasion.”

Still to be decided, if his potential third-term campaign song will be “Nobody Does it Better” or “You’re So Vain” No calls have been made yet to Carly Simon for comment.

October 2, 2008 | Permalink | User Comments (2) | TrackBack (0)

'Foreclosed' Flag Flies Near Wall Street

October 01, 2008 3:37 PM

ABC News' Sarah Amos reports: First came the “billionaire lovers”  --  protesters with signs proclaiming that billionaires love Wall Street. Then  came the masked “greed girls,” who wore  T-shirts urging the arrest of President Bush.

But perhaps the most attention-grabbing spectacle of the day took place when members of the group Code Pink scaled the flagpoles behind the New York City’s iconic bull statue. The point of the climb? To hang a giant American flag bearing a “FORECLOSED” stamp on its stripes.

Demonstrators gathered near the bull in New York’s financial district to make known their opposition to the government’s proposed $700 billion rescue plan.

"We agree we need a bailout that supports American families and that stops Wall Street from putting our economic situation at risk," said Jennifer Krill, the program director of the Rainforest Action Network, one of the groups at the protest.

"We have as American citizens a right to remain silent but a responsibility to speak out,” she said. “The choice is ours: Are we going to let Wall Street trash America's future?”

Though the demonstration hadn’t received advanced approval from the city, protesters and police were generally on cordial terms. That didn’t, however, save the two flagpole climbers from the long arm of the law  -- they were arrested as soon as they hit the ground.

October 1, 2008 | Permalink | User Comments (27) | TrackBack (0)

Christmas Creep Hits October

October 01, 2008 2:57 PM

ABC News’ Scott Mayerowitz reports: “Oh what fun it is to ride in a one-horse open sleigh…”

Welcome to Christmas, um, I mean October. But if retailers have their way, you will soon be singing Jingle Bells and parting with your cash.

That’s right, 12 weeks before Christmas some retailers are already hawking gifts.

Apparently worried about the economy and consumers’ fears, Wal-Mart kicked off the holiday season today. (Yes, your calendar is right, it is Oct. 1.) The world’s largest retailer has reduced prices on some of the most popular toys, and will fast track the opening of “Christmas shops” in stores nationwide.

There is big money at stake. Holiday sales account for roughly 20 percent of retailers’ annual sales. If they can extend the season by a week or two, they hope to draw in more shoppers and boost the bottom line.

It’s called “Christmas creep,” and this year it seems to be occurring more than ever. Besides a poor economy, there are also five fewer days between Thanksgiving and Christmas Day than in 2007. No matter how much creep there is, Thanksgiving and the “Black Friday” sales after it will probably always be the real start of the holiday shopping season.

But don’t expect me to go gift shopping anytime soon. I have yet to shop for a Halloween costume.

October 1, 2008 | Permalink | User Comments (22) | TrackBack (0)