As if last week wasn't wild enough?
As we reported on Monday, the House vote on the financial services stabilization plan failed. The failure of the vote caused a 778 point plunge in the Dow Jones Industrial Average. Reports of the day's activity in Washington showed the Democrats being combative, the Republicans being petty, and very few really trying to get anything done. Partisan politics and election year pressures seemed to rule yet again.
The House was not in session on Tuesday due to a religious holiday, but the market rebounded, recovering over half of Monday's losses. The negative sentiment returned Wednesday ahead of a Senate vote on the bill, or some version of it. Wednesday evening, the Senate came in and added modifications to the House bill (including over $100 billion in additional spending to "sweeten" the deal), and it overwhelmingly passed in the Senate. 74 Senators, including both Presidential candidates, voted for the bill. However, this bill isn't quite the same one that the House turned down. The original House bill was reportedly only three pages long. The "sweetened" bill came in at about 450 pages.
Earlier today, the House voted on and passed the Senate bill, and President Bush has stated that he will sign it. The market had been up over 200 points prior to the vote passing, but upon news of the vote, the market sold off, quickly losing almost all 200 points of the gain. During the remainder of the day, the market struggled to remain positive, but closed the day down 159 points. We closed the week off over 800 points.
Wachovia had a deal worked out to sell its banking operations to Citigroup, but that was undone Thursday night when Wells Fargo stepped in and purchased Wachovia. Also on Thursday it was announced that Warren Buffet had purchased $3 billion worth of General Electric preferred stock. The terms were similar to those of last week's purchase of Goldman Sachs preferred stock.
Economically, things are looking pretty shaky. Today's jobs report showed a decline in all sectors except government. Unemployment hit a 7 year high, while factory orders declined 4%. Borrowing at the Fed Discount window has surged - this is usually the last place banks want to go for borrowing, as it has historically been seen as a desperate measure. The issues are not all domestic either, as foreign governments have had to step in and enact their own rescue plans. The European Central Bank and the Bank of England have both moved to make it easier for banks to access liquidity, and South Korea pumped $5 billion into its banking system. We are experiencing a global slowdown.
The plan as passed today should help, at least in terms of aiding in stabilization. Whether or not it will end the crisis remains to be seen. But the crisis, as it stands right now, is largely driven by confidence. If we can regain some confidence that the assets we have deposited with banks, money market funds, and other financial institutions will not simply be wiped out, we will be on the way out of this mess. Right now, a lack of confidence in the system is resulting in banks not even lending to other banks, freezing up nearly all sources of credit. The same lack of confidence has people pulling their money from banks, from money market funds, from virtually all types of financial instruments. I believe the stabilization plan will go a long way to restoring that confidence, at least between the financial services companies. Whether it restores Main Street confidence remains to be seen.
