The Wall Street See-Saw Ends Up ... Up
Thursday, September 18, 2008SUSIE GHARIB: The nation's top leaders will meet tonight in Washington, D.C., to discuss ways to resolve the credit crisis. Senators and congressman from both sides of the aisle will talk with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke about steps to stabilize the financial markets. The session comes after a huge late day rally on Wall Street on word that something could be in the works. The Dow surged in the final hour of trading, going from almost flat to 410-point closing gain, that's its biggest one-day gain in six years. The NASDAQ jumped 100 points, or almost 5 percent. Investors were also encouraged by a big capital injection by the Federal Reserve this morning. We have two reports tonight looking at a potential government rescue plan and the Fed's intervention in the financial markets. We begin with Darren Gersh in Washington.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Republican presidential nominee John McCain today announced his support for what could become the most sweeping financial rescue plan in U.S. history. There were few details, but the centerpiece of the effort would be a new mortgage and financial institutions trust that would clear the wreckage left from the housing and Wall Street bust.
SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL CANDIDATE: The priorities of this trust will be to work with the private sector and regulators to identify institutions that are weak and take remedies to strengthen them before they become insolvent. For troubled institutions this will provide an orderly process through which to identify bad loans and eventually sell them.
GERSH: The move could put McCain in the company of Democrats like House Financial Services Committee Chairman Barney Frank, who floated a similar idea on NIGHTLY BUSINESS REPORT last night. Even so, McCain was blasted by New York Democrat Charles Schumer, who called this a bailout for the Wall Street firms in his state.
SEN. CHARLES SCHUMER (D), NEW YORK: The federal government would take on all the risk of the bank's troubled assets without addressing the root of the problem: the housing market. Proposals like Senator McCain's may help Wall Street, but they'll do nothing for Main Street.
GERSH: In his speech, McCain referred to the Resolution Trust Corporation set up to buy the assets of thrifts that failed in the late 1980s. By the time the RTC wound down, it had taken over more than a thousand thrifts with half a trillion dollars in assets. The ultimate cost to taxpayers: $124 billion. This time, economist Desmond Lachman says the costs of the bailout could hit ten figures.
DESMOND LACHMAN, ECONOMIST, AMERICAN ENTERPRISE INSTITUTE: We've got to clean up the banks, which will cost anywhere between $1 trillion and $2 trillion to do, I would think. And on top of that, we've got to stabilize the housing market.
GERSH: Former Federal Reserve economist Ted Truman says it's also unclear whether a new RTC would simply put off the inevitable.
TED TRUMAN, ECONOMIST, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS: You want to accomplish I think a little bit more than just sort of wiping the slate clean and saying, we are going to start over again, because even when you do that, you have to figure out what you are going to do with all that toxic waste.
GERSH: The Treasury has said for months that it is looking at all options, including something like the RTC. But administration officials also know it won't inspire confidence in the markets to ask Congress for a complex piece of legislation that can't be delivered in the 47 days before a presidential election. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Scott Gurvey in New York. The Federal Reserve began its day at 3:00 a.m., the start of the trading day in Europe. Coordinating with other central banks in Europe and Asia, the Fed literally flooded the world with money, $180 billion were injected into money markets where borrowing had virtually ground to a halt as scared participants tallied the losses from failed debt instruments. The central banks' move had the desired effect with stock markets opening up sharply even as interest rates fell around the world. But throughout the day markets proved vulnerable to any kind of news, whether fact or rumor. Economist Thomas Cooley, dean of NYU's Stern School of Business, says that's because the Fed's unprecedented action, while welcome, did not calm investor's fears.
THOMAS COOLEY, DEAN, NYU STERN SCHOOL OF BUSINESS: The real issue is that nobody knows how deep the financial problems are, how bad the assets that banks are holding are, and how much more is there to find out about these large banks, investment banks, and even some of the commercial banks. So the question is really, when are we going to get all of this toxic stuff off of banks' balance sheets?
GURVEY: Experts say the crisis of confidence will not end until policymakers are able to convince the markets that there is a mechanism in place to deal with liquidity concerns, also needed, a long range plan to rein in the freewheeling credit markets. But Andrew Burkly, market strategist at Brown Brothers Harriman, who owns shares of Wachovia (WB), upgraded his tactical outlook from neutral to bullish. He says it is not too early to think of buying, even in the financial sector.
ANDREW BURKLY, MARKET STRATEGIST, BROWN BROTHERS HARRIMAN: Wells Fargo (WFC), Wachovia, Bank of America (BAC), those are still pretty high quality big deposit gathering institutions, so much safer I think getting into some of those names as opposed to certainly the more risky investment banks. But I would also look at, you know, more stable names within the staples sector, within the health care sector. They tend to be certainly less sensitive to the big de-leveraging process that's going on in the financial sector.
GURVEY: In a joint statement today, the central banks say they will continue to work together closely, and will take appropriate steps to address the ongoing pressures on financial markets. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
