Government Involvement Builds Confidence On Wall Street
Friday, September 19, 2008SUSIE GHARIB: A collective sigh of relief on Wall Street today as stocks surged after the government announced a sweeping plan to rescue the nation's ailing financial system. The Dow soared 368 points, closing at 11,388, more than 1,000 points above yesterday's intra-day low. The Nasdaq jumped 75. The rally capped an extraordinary week in which the Treasury, the Federal Reserve, and the Securities and Exchange Commission took unprecedented actions to restore investor confidence. They're setting up a fund to buy troubled mortgage-related securities, moving to insure money market funds and temporarily banning short-selling of almost 800 financial stocks. We have two reports looking at the government's proposal and Wall Street's reaction to it. We begin with New York bureau chief Scott Gurvey.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT NEW YORK BUREAU CHIEF: The opening on Wall Street was simply explosive. The Dow Jones Industrial Average gaining 400 points in a matter of minutes. Trader Theodore Weisberg says it was all in response to government actions to end what he sees as one of the worst financial crises in history.
THEODORE WEISBERG, TRADER, SEAPORT SECURITIES: People were as close as you could get to being in panic mode than I've seen since '87. So I would say, you know, it's always a different catalyst, but the emotional aspect of it is always the same because I think 80 percent of stock trading is basically driven by human emotion and you can't legislate or control what people do. When people get nervous and they start to panic, you know, it's difficult to stop that train.
GURVEY: It is difficult to comprehend just how complete that panic had been. Following the Lehman Brothers (LEH) bankruptcy, the credit markets literally stopped working. It was impossible for businesses, including financial sector titans, to raise capital. The flight to safety was so complete, interest rates on two-year Treasuries fell to zero. David Katz of Matrix Asset Advisors notes that even some money market funds were at risk.
DAVID KATZ, CHIEF INVESTMENT OFFICER, MATRIX ASSET ADVISORS: The government stepping in and basically insuring money markets that follow certain rules takes that off the table. That takes a tremendous risk out of the equation. The fact that they're helping eliminate bear raids on companies takes the risk of a Goldman Sachs (GS) imploding in a two-day period off the table. That helps free up the whole commercial paper market again. It allows banks to lend to on another again. So we think as costly as the moves that the government has made today, you're really talking about $0.10 on the dollar about problems that it saves six months out or even two weeks out.
GURVEY: That was the clearly the consensus of the markets as a two-day rally saw the S&P 500 gain 8.5 percent. Still, Mike Ryan of UBS Wealth Management says it is too early to tell if the crisis is over.
MIKE RYAN, CHIEF INVESTMENT STRATEGIST, UBS WEALTH MANAGEMENT: The devil is in the details. We don't know much about what institutions will be covered. We don't know much about the magnitude of the program. We also don't know what they're going to do in terms of taking what types of assets into it. So again, I think it's a very, very encouraging step. It's certainly necessary in this process, but it's still too early to tell exactly how the market is going to react overall long term to this.
GURVEY: In the short term, the markets ended a tumultuous week on huge volume and, ironically, from last Friday to today's close, with the major averages virtually unchanged. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
DARREN GERSH, NIGHTLY BUSINESS REPORT WASHINGTON BUREAU CHIEF: This is Darren Gersh in Washington. Treasury Secretary Henry Paulson's argument for a massive fund to buy up toxic financial assets came down to this: Wall Street had to be rescued in order to save Main Street.
HENRY PAULSON, TREASURY SECRETARY: I am convinced that this bold approach will cost American families far less than the alternative, a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.
GERSH: While Wall Street surged, Washington reeled. Lawmakers were stunned by the magnitude of what they have been asked to do in just a few weeks. With so much money on the line, Senate Banking Committee Chairman Chris Dodd says the new legislation has to go to the root of the problem.
SEN. CHRIS DODD (D-CT), CHAIRMAN, BANKING COMMITTEE: My hope is that this plan will not only allow it to deal with illiquid debt obligations out there, but also focus as well on bringing to a closure the foreclosure problems.
GERSH: The Treasury plans to limit the new "Troubled Asset Relief Program" to U.S.-based institutions. The thinking now is that hedge funds would not be eligible for help. Asset managers will be hired to help run the program. But it is still unclear exactly what assets will the U.S. government will buy, and at what cost to taxpayers? While Paulson is talking about hundreds of billions of dollars, other analysts are looking at a trillion or more. ISI Group's Tom Gallagher says it depends on what the government is willing to pay for assets the market no longer wants.
TOM GALLAGHER, POLITICAL ECONOMIST, ISI GROUP: So I think where the price is, is really an important consideration here. The higher the price for the asset, the better for the financial institution, but the worse it is for taxpayers. So something that is really effective is going to be really costly and therefore controversial.
GERSH: Amazing as it is to say, the entire U.S. financial system now has a direct lifeline from Uncle Sam. Look what happened in just 24 hours: The Treasury began insuring $2 trillion in deposits at money market funds; the Federal Reserve began pumping money into banks to keep the asset-backed paper that funds credit cards and auto loans from shutting down; regulators ordered Fannie Mae (FNM) and Freddie Mac (FRE) to buy up more mortgage- backed securities, potentially as much as $140 billion worth; and the Securities and Exchange Commission banned short sales in 799 financial stocks, effectively shutting out speculators. While the federal government is putting taxpayers on the hook for potentially enormous losses, the president suggested the ultimate cost should be manageable.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: We expect that this money will eventually be paid back. The vast majority of assets the government is planning to purchase have good value over time.
GERSH: Will it work? Today's market rally suggests it might. But the financial system is now being run out of Washington and many answers will depend on the fine print and the political process. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
