A Record Fall on Wall St.

The United States House of Representatives voted against the $700 billion emergency rescue package for beleaguered financial companies. Video by AP
By Heather Landy and Renae Merle
Washington Post Staff Writers
Tuesday, September 30, 2008

NEW YORK, Sept. 29 -- Without a federal bailout plan to prop up confidence in the U.S. financial system Monday, stocks fell sharply around the globe, oil sank, gold soared and yields on government debt skidded closer to zero as traders ran from risk and sought safe-haven investments.

The Dow Jones industrial average tumbled 7 percent, or 777.68 points, eclipsing the record point drop after the Sept. 11, 2001, terrorist attacks, to close at 10,365.45. The technology-heavy Nasdaq composite index slid 9.14 percent, or 199.61, to 1983.73, and the broader Standard & Poor's 500-stock index lost 8.79 percent, or 106.62, to close at 1106.39.

A rush into safer securities pushed down yields on Treasury debt, while crude oil fell more than $10 a barrel on concern that the financial crisis would put a big dent in demand for petroleum products.

Underlying the panic is a seizing-up of the credit markets that provide companies with financing for expenses such as payroll and inventory. Analysts said banks are lending less as they try to conserve cash for their own balance sheets, while nervous investors are forcing companies to pay higher interest rates to borrow in the debt markets.

"The credit markets are kind of like the oil for an engine that allows companies to buy something and finance it. And if they don't have the ability to finance that at a reasonable cost, then all of the sudden their profit margins are going to get squeezed and they're perhaps not going to be able to hold as much inventory, and this is happening around the globe," said Jim Hannan, managing director for fixed-income strategy at MTB Investment Advisors in Baltimore.

"You need to be able to have credit, and it needs to be at a reasonable price, for the economy to function," Hannan said. "If companies can't finance future production or expansion plans, at the end of the day, that is going to equate to slower economic growth."

Marc Pado, U.S. market strategist at Cantor Fitzgerald, said the effects of constricted lending already are showing up in the agriculture business, where farmers often are dependent on short-term loans to buy seeds and fertilizer for the next season's crop. "If the bank says no, they're not going to plant. The fertilizer companies aren't seeing the orders they normally see at this time of year," Pado said. "It goes beyond comprehension once you start digging into who uses short-term debt and the impact they have on the next person in line."

In the commercial-paper market, where companies can sell debt maturing in nine months or less, some companies that used to pay less than 3 percent to borrow are now paying double that rate, investors said.

Debt holders also are demanding richer premiums to offset the risk of holding longer-term corporate debt. Caterpillar, the farming and construction equipment maker, last week sold $1.3 billion of five- and 10-year notes that were priced to yield at least 3.2 percentage points more than Treasurys with similar maturities. That was nearly a full percentage point wider than the spread on previously issued Caterpillar notes, investors said.

The credit markets have been socked before. Lending froze up a decade ago after the failure of the hedge fund Long-Term Capital Management, and in the decade before that after the 1987 stock market crash. But in both of those instances, the markets loosened after a day or two, said Glenn Migliozzi, chief investment officer at Green Eagle Capital in Lake Forest, Ill.

"The Fed is going to lower rates," he said. "They're going to have to."

Federal Reserve Chairman Ben S. Bernanke, along with Treasury Secretary Henry M. Paulson Jr., had urged Congress to pass legislation that would allow the government to buy bad debt such as mortgage loans from financial firms.

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