By Renae Merle
Washington Post Staff Writer
Friday, September 19, 2008 5:29 PM
Wall Street's tumultuous week, which included the disappearance of two major investment firms and the rescue of the nation's largest insurer, culminated with nearly a 400-point rally today as the government laid out a financial rescue plan that could cost hundreds of billions of dollars.
The Dow Jones industrial average, which jumped between massive losses and gains this week, closed up today 369 points, or 3.4 percent, at 11,388.44. That is on top of a 410-point gain late yesterday after news of a government rescue effort emerged and brings the market near break-even for the week -- sweeping away Monday's 500-point loss.
The technology-heavy Nasdaq gained 75 points today, up 3.4 percent, closing at 2,273.90. The Standard & Poor's 500-stock index rose 49 points, or 4 percent, to close at 1,255.08. After taking massive losses earlier in the week, the Nasdaq and S&P ended in positive territory overall.
Global markets also closed up on the news. European markets rose on the order of 5 7 to 9 percent, while Asian markets overnight added anywhere from 4 to 9 percent.
"It's the craziest week I have ever seen and I have been doing this since 1983," said Art Hogan, chief market analyst at Jefferies & Co. "We have some households names that don't exist anymore -- Lehman, AIG -- in real terms Fannie and Freddie no longer exist as we knew them." The government seized control of mortgage giants Fannie Mae and Freddie Mac two weeks ago.
Judging by today's Dow close, "you wouldn't know that Lehman was decimated this week," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC. "You wouldn't know that there were emergency meetings trying to rescue what will be left of Wall Street."
After watching the credit market grind to a near standstill, the government said today it would lift the financial sector by taking on the bad debts of troubled banks, propping up money-market mutual funds and temporarily banning short selling of financial stocks.
"It's a massive relief rally on the back of the comprehensive plan," said Joseph Brusuelas, chief economist for Merk Investment. "If you have hundreds of millions of mortgage-backed securities on your books that you cannot value -- much less sell -- you can now unload them to the U.S. government."
The government's actions cap a dramatic week in which Lehman Brothers, the 158-year old investment bank was forced into bankruptcy, Merrill Lynch was quickly acquired by Bank of America and American International Group accepted a $85 billion government loan to avoid bankruptcy. Investors, who had feared a meltdown of the financial system, instead cheered a government proposal that became known last night to steady the economy and appeared more confident that the intervention could have a lasting impact.
"I think it's the feeling that instead of going at things on a case-by-case basis you will have a comprehensive solution," said Bill Stone, chief investment strategist for PNC Wealth Management. "The government is acting in the way they have learned you have to in these situations in order to prevent the ultimate downside risk."
Under the U.S. government's plan to stabilize the nation's financial system, Treasury is asking Congress for the authority to buy the distressed mortgages weighing down financial firms. This is expected to cost hundreds of billions of dollars. Treasury will also tap up to $50 billion from a Depression-era fund to insure the holdings of money-market mutual funds, intervening to shore up a sector once considered among the safest investments.
"Given the precarious state of today's financial markets, and their vital importance to the daily lives of the American people, government intervention is not only warranted, it is essential," President Bush said today.
Treasury is expected to work through the weekend with congressional leaders on the plan. "Despite these steps, more is needed. We must now take further decisive action to fundamentally and comprehensively address the root cause of our financial system stresses," Treasury Secretary Henry M. Paulson Jr. said at a news conference today.
But the costs of the program are high, and questions remain about how quickly Congress will be able to act. There is $800 billion in subprime and other types of high-risk loans on the books of financial firms around the world, most of them on U.S. balance sheets, said Brian Bethune, chief U.S. financial economist for Global Insight.
"Conceivably they could do it. It's not outside the realm of possibility, but it is going to require a lot of rapid footwork here," Bethune said.
Details of Treasury's proposals remain elusive, and the plan doesn't address other issues hampering the economy, including declining home values, said Sean Ryan, an banking analyst at Sterne Agee in New York. "It will be either ineffective or it will be a really grotesque bailout of the worst-managed institutions in the country in providing money to buy these bad assets."
Helping boost financial stocks, the Securities and Exchange Commission said overnight that it would temporarily ban short selling of the sector's shares. Short sellers place bets that shares will fall and have been blamed, in part, for dragging down the shares of financial firms and threatening their existence.
Global markets seemed to respond to both the U.S. promise of broader relief and the immediate disappearance -- for now -- of the effects of short selling.
Hong Kong's Hang Seng index closed nearly 10 percent higher, and other major Asian exchanges rose by anywhere from 4 to 6 percent.
London's FTSE 100 was higher by nearly 9 percent, with financial stocks there reacting dramatically to action by the country's Financial Services Authority. Similar to the steps announced by the SEC, British authorities limited short selling in 29 financial companies, including Lloyds TSB bank and its recent takeover target, mortgage company HBOS. The list also included the Royal Bank of Scotland and several insurance companies whose stocks have been plummeting.
The stock exchange in Russia jumped so quickly at its open -- a full 18 percent -- that regulators temporarily suspended trading.
U.S. financial stocks, which have traded at deep losses this week, shot up today. Goldman Sachs and Morgan Stanley, the two remaining investment banks, were up 18 percent and 16 percent respectively. Both has endured questions about their ability to remain independent.
"It's just breathing space," said Ryan. "In the long term it doesn't help at all, but in the short term it stops the bear raid on Morgan Stanley and Goldman Sachs."
Washington Mutual, which has also faced market pressure, shot up 63 percent in early trading, then closed at $4.25, up 42 percent. There was a report today that six potential bidders had emerged for Washington Mutual, but analysts said that the government's actions could help slow the industry's frenzied pace of consolidation. Financial firms now may be able to hold off pressure from market skeptics, while the government implements its rescue plan, they said.
"These companies have likely bought some time before they have to run into the arms of someone else," Stone said.
While the details in many cases are still being worked out, the financial market has forever changed, analysts said, from the demise of two large players -- Lehman and Merrill -- and the bail out of another, AIG. "The only thing that is certain is that we have seen the end of the old financial order and the probability that the federal government will play a much larger role in matters of finance," said Brusuelas from Merk.
Staff writer Howard Schneider contributed to this report.