MarketView for September 29

Summary

 

Wall Street was hammered on Monday; there is no other way to put it. However, it was not just the Congressional vote that vetoed the bailout package for the economy. There was also end of the quarter window dressing by investment managers and a general bewilderment as to where the economy is heading that is testing the patience of investors. As a result, the score at the end of the trading day was that stock prices chalked up their largest decline ever.

 

The Dow lost 778 points, its largest point decline in history, and posted its largest daily percentage slide since the 1987 stock market crash. The benchmark S&P 500 also had its worst day in 21 years after the House voted down the bailout plan by a count of 228 to 205. An index of financial services shares lost 16 percent, while Bank of America ended the day down 17.6 percent to $30.25. Goldman Sachs slid 12.5 percent to $120.70.

 

The failure of the bill, which would have let the Treasury buy up bad mortgage debt from struggling banks in an effort to kick-start much needed lending, was seen as crucial to shielding the economy from an even deeper slowdown.

 

Fear was deep and widespread, as investors dumped stocks for the relative safety of government bonds. The Chicago Board Options Exchange Volatility Index, Wall Street's main barometer of investor fear, jumped 39 percent to 48.40, a nearly six-year high, and was at 46.72 at the close.

 

Technology shares also took it on the chin with Apple leading the way with a decline of 18 percent to $105.26 after several brokerages slashed their recommendations on the tech bellwether. Keeping Apple company was Google which ended the day down 11.6 percent to $381, near a two-year low hit earlier in the day. The tech-heavy NASDAQ had its worst day since April 2000 when the Internet bubble collapsed.

 

The bailout's demise comes after Wachovia was forced to sell most of its assets to Citigroup in a deal brokered by the Federal Deposit Insurance Corp. That followed fast upon fresh signs that financial market turmoil was spreading around the world. European authorities in recent days were forced to step in and rescue a group of banks in Britain, Belgium and Germany.

 

The bailout plan met heavy resistance from Republicans, who balked at the price tag and voted against the bill by a margin of more than 2 to 1. A majority of Democrats voted yes.

 

Regional Banks Feel The Pressure

 

Shares of regional banks fell on Monday, with Sovereign and National City down 60 as investors began to worry about which banks will need a merger partner in order to survive amid the upheaval in the financial system.

 

As losses mounted among the leading financial institutions, such as Bank of America and JPMorgan Chase, regional banks received the hardest punch in what is best labeled as a deepening crisis of confidence.

 

Among losers, Fifth Third Bancorp fell 36 percent, FirstFed was down 44 percent, and KeyCorp down 18 percent. The closely watched S&P Financial index sank 10 percent. These regional banks are receiving a double hit from a weakening mortgage market and a weakening economy. Fifth Third Bancorp, with 5.8 million customers and 1,300 locations in the East, was down $6.09 to $10.07, while KeyCorp lost $2.70 to $12.00, and FirstFed fell $4.49 to $5.55.

 

Wyomissing-Pennsylvania based Sovereign, a bank with 750 branches in the Northeast and around $79 billion in assets felt the pressure on Monday. Shares of Sovereign sank $5.62, or 67 percent, to $2.77, wiping out almost $5 billion of market value. In addition, Ohio-based National City fell $2.26 or 61 percent to $1.44, losing $1.7 billion of market value.

 

National City said in a press release it was better capitalized than Washington Mutual and Wachovia and had less exposure to troubled mortgage loans. The bank also said it had no intention or need to raise additional capital.

 

Dollar Gains On Euro — Down Against Yen

 

The dollar benefited from risk aversion globally on Monday, as stock markets fell sharply and central banks were forced to rescue banks in several countries. At least five banks in Britain, Belgium, Russia, Iceland and the U.S. were rescued by authorities over the weekend, forcing mammoth injections of cash into the global banking system by central banks.

 

The action increased reciprocal swap lines with the European Central Bank and eight other central banks to $620 billion from $290 billion previously.

 

The Japanese yen rose against the dollar despite an unwinding of carry trades, repaying low cost yen which had been borrowed to invest in higher yielding but riskier assets in other countries. The unwinding of carry trades, which are funded by borrowing in the yen, saw the Australian dollar diving more than 5.0 percent to 83.54 yen and the New Zealand dollar dropping 3.7 percent to 70.11 yen.

 

In late New York trading, the dollar was down 1.6 percent at 104.21 yen. The low-yielding Japanese currency also surged against the euro, with the European single currency dropping 2.7 percent to 150.54 yen.

 

Despite the rejection of the U.S. bailout plan by the House of Representatives, the U.S. dollar held its gains versus the euro, with market attention still fixed on the crisis in European banking.

 

Briti9sh sterling dropped to a 10-day low at $1.7962 after the government nationalized the lending business of Bradford & Bingley. Retail branches and deposits were sold to Spanish bank Santander. Sterling was last down 1.8 percent at $1.8117, its worst one-day loss since late 1996.

 

The banking contagion also spread to Iceland, with the government taking control of Glitnir, its third-biggest bank. The Icelandic crown plunged to a record low versus the euro at 144.85.

 

Crude Prices Fall

 

The price of crude oil fell by 10 percent on Monday after the House of Representatives rejected the $700 billion rescue package for the financial sector. Domestic crude futures for November delivery settled down $10.52 per barrel at $96.37 in the second largest drop since April 23, 2003.

London Brent crude settled down $9.56 per barrel at $93.98.

  

The mounting economic crisis has stirred concerns about oil demand, helping drag prices from a record high above $147 a barrel in July. In addition, investors who had rushed into commodities earlier this year as a hedge against inflation and the weak dollar have sold crude for safer havens.

 

Finally, traders were watching the slow recovery of oil infrastructure following after Hurricane Ike hit the U.S. Gulf of Mexico, while the U.N. Security Council unanimously passed a resolution on Saturday that again ordered OPEC nation Iran to halt its nuclear enrichment work, but it imposed none of the new sanctions Washington and its allies wanted.

 

Fed Adds Billions of Dollars

 

The Federal Reserve and foreign central banks pumped billions of dollars into cash-strapped banks at home and abroad in a dramatic bid to break through a credit clog and spur lending. The Fed said the action is intended to "expand significantly" the cash available to financial institutions, its latest effort to relieve the worst credit crisis since the Great Depression.

 

The goal is to boost the amount of quick cash available to banks and other financial institutions so that they'll feel more confident and inclined to lend not only to each other but also to people and businesses.

 

Credit is the economy's lifeblood and the global credit clog, which started a year ago and grew much more severe in the past few weeks, has made it increasingly difficult for people and businesses to borrow money. The crisis if it persists could plunge the economy into a recession, President Bush and Fed Chairman Ben Bernanke have warned.

 

The Fed action came hours before the House defeated a $700 billion financial bailout plan, ignoring urgent pleas by Bush and Bernanke to move swiftly.

 

The plan was designed to break through a dangerous credit clog that has threatened to freeze up the entire financial system and throw the economy into a recession. At the heart of the plan, the government would buy bad mortgages and other dodgy debts held by banks and other financial institutions. By getting those rotten assets off their books, financial institutions should be in a better position to raise capital and boost lending, supporters contend.

 

The Fed's action on Monday expands programs already in place. It is unclear whether it will break through the credit bottlenecks. Its previous actions have provided relief, but haven't halted the crisis. Against this backdrop, central banks will continue to work closely and are prepared to take "appropriate steps as needed" to ease the crisis and get banks lending again, the Fed said.

 

A new tact from the Fed is to increase the amount of 84-day cash loans available to U.S. banks. The Fed is increasing the amount to $75 billion, up from the current $25 billion starting on Oct. 6. Banks bid on a slice of the loans at an auction. That move will triple the supply of 84-day loans to $225 billion, from $75 billion, the Fed said.

 

Meanwhile, the Fed will continue to make $75 billion worth of shorter, 28-day loans available to banks. All told, the total amount of cash loans, 84-day and 28-day, available to banks will double to $300 billion from $150 billion, the Fed said.

 

Moreover, the Fed made an extra $330 billion available to other central banks. That boosted to $620 billion the total amount available to the central bank through currency "swap" arrangements, where dollars are traded for their currencies. That total is up from $290 billion previously being made available through such arrangements.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Swiss National Bank and the central banks of Denmark, Norway, Australia and Sweden are involved in those swap arrangements.

 

Fannie, Freddie Receive Subpoenas

 

Fannie Mac and Freddie Mac are facing a federal grand jury investigation into their accounting practices. The mortgage finance companies said Monday that a federal grand jury in New York is investigating accounting, disclosure and corporate governance issues at the two companies. The government investigation focuses on activities starting in 2007, Freddie Mac said in a statement.

 

Fannie and Freddie said they received subpoenas Friday from the U.S. Attorney's office in Manhattan as well as requests from the Securities and Exchange Commission that they preserve documents. Fannie Mae and Freddie Mac were taken over by the government earlier this month as their mounting defaults and foreclosures threatened the entire mortgage market.

 

There have for a long time been questions regarding the two companies' bookkeeping procedures. Last November a Fortune magazine story said new accounting procedures at Fannie Mae masked potential losses on bad loans. Several years ago, both Fannie and Freddie were forced to restate billions in earnings after federal regulators discovered accounting irregularities at both companies.

 

The scandals led to the replacement of the companies' top executives. Freddie Mac's former CEO, Gregory Parseghian, was ousted in December 2003. Fannie CEO Franklin Raines and chief financial officer Timothy Howard was forced out of office a year later. Both companies said they would cooperate fully in the investigations, not that they really have a choice.

 

Three weeks ago, the government seized control Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, with a rescue plan that could require the Treasury Department to inject as much as $100 billion into each to keep them afloat.

 

A spokeswoman for the Federal Housing Finance Agency, which controls the companies, said the housing agency, "will work with the companies to assure a smooth and efficient process and will work with the government agencies as they undertake their inquiries."

 

Law enforcement officials said last week the FBI is looking at potential fraud by Fannie, Freddie, and insurer American International Group. The inquiries will focus on the financial institutions and the individuals that ran them, the senior law enforcement official told the Associated Press last week.