October 2008: Wall Street’s worst week ever

The week's events of how financial superpowers tried to halt the free fall, according to cnbc

Monday October 6th

Fed Reserve chief Ben Bernanke doubled the cash made available to banks for emergency loans to a whopping $900 billion.  Still, the Dow plunged 365 points and closed below 10,000 for the first time since 2004.

Tuesday October 7th

Ben Bernanke, a scholar and authority on the Great Depression, began dropping money from helicopters—if not literally then figuratively. He announced the unprecedented action of lending directly to non-financial companies through the commercial paper market. And on the news major indexes dropped more than 5% to their lowest levels in 5 years.

Wednesday. October 8th

The whole globe responded. In a coordinated move, central banks around the world including the U.S, Britain and China cut their benchmark interest rates. At first it looked as if the historic move would stabilize world markets. But in the final hour of trading the Dow dropped nearly 200 points.

Thursday October 9th

Reports began to swirl that the Treasury might buy stakes in America's banks but the Street questioned whether that’s too little too late after shares of General Motors lost a third of their value in one day. Only 48 hours after closing below 10,000, the Dow plunged below 9,000 on fear that the crisis had spread well beyond the financial sector.

Friday October 10th

Investors anxiously wait for a response from global financial leaders gathered in Washington after we learned that America's banking system is not built solely on money but bonded by trust. And until this trust is restored this awful week on Wall Street may get worse.

The Way Forward

Of course there’s a way out of this miss. The Fast Money traders have some ideas and they follow.

1. Suspend actions of the ratings agencies.
2. Create CDS exchange
3. Determine who needs to step in and buy
4. Close the market?
5. Generate individual circuit breakers
6. Perp walks

What was agreed upon so far

Recapitalization Plan For Financial Firms– With the legislation’s main mechanism—an auction system to purchase bad mortgage-based securities—still weeks away from implementation, Paulson now plans to make big capital injections into large financial institutions and get equity in return.

Though deatils of the Treasury's term-sheet plan are just beginning to emerge, it is by no means a simple undertaking. There are some 8,400 banks and savings and loans in the country with government-insured deposits.

G7 Vow to do all they can to stop financial crisis– with no real concrete plans drawn out yet, this open ended statement was all they can come up with for the weekend.

More Euro countries to follow Britain's bank guarantee rescue plan- A source close to the French presidency said the euro zone leaders would discuss the possible creation of a bank rescue package which will take Britain's initiative as a reference.

"There are two competing models. The American model, which no one wishes to draw inspiration from, and the British model. This is what everyone is talking about," the source said, on condition of anonymity.

Britain's rescue plan, launched last week, involved injecting 50 billion pounds ($86 billion) of taxpayers' money into its banks and, crucially, to underwrite interbank lending which has all but frozen around the globe.

What Investment Veterans say about the fall- some veteran investors, including G. Kenneth Heebner, a mutual fund manager who has one of the best long-term track records on Wall Street, say that the sell-off has gone much too far and stocks are poised to rally powerfully if the downturn is less severe than investors fear.

“The fact is, there are a lot of tremendous bargains out there,” said Mr. Heebner, who manages about $10 billion in several mutual funds. Indeed, by many measures stocks are as cheap as they have been in the last 25 years.

Mr. Heebner expects world economies to contract over the next year. But he said the market plunge in the last week was no longer being driven by rational analysis. Stocks are probably falling because of a combination of panic and forced selling by hedge funds that must meet margin calls from their lenders, he said.

Mr. Heebner is not alone in his optimism.

“I think in years to come — I wouldn’t say months to come — we will perceive this as being a great value-buying opportunity,” said David P. Stowell, a finance professor at Northwestern and a former managing director at JPMorgan Chase. “Two and three years from now, it will seem very smart.”

Fall valuation in perspective- Those ratios are historically low. Over all, the Standard & Poor’s 500-stock index is trading at about 13 times its expected profits for 2009, its lowest level in decades. In contrast, at the height of the technology bubble in early 2000, the stocks in the S.& P. traded at about 30 times earnings, the highest level ever. At the same time, the 10-year Treasury bond paid about 6 percent interest, compared with less than 4 percent today.



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