Sunday, June 21, 2009

What the @#$% Happened in September-November 2008: Part III

This is Part III of What the @#$% Happened in September-November 2008 (here are Part I and Part II), which covers from September 29 to October 3, 2008. It was the week in which Paulson's bank bailout plan was first rejected, re-worked, and finally passed despite the strong opposition from the public. It was the beginning of the cascading market crash of 2008.

This was also the week in which the Federal Reserve's balance sheet grew exponentially in its effort to support the global financial system.

With that in mind, let's go to the headlines of Investor's Business Daily front pages. As before, the indices' numbers are those of the day prior to the date; the same goes for the news headlines.

Headlines from:

Tuesday, September 30, 2008
(Dow Jones Industrial 10,365, S&P 500 1,106, Nasdaq 1,983)

  • Rescue Rejected; Stocks Dive. House says No To $700 Bil
  • Divided House Rejects Rescue by 228-205. More than two-thirds of Republicans and 40% of Dems opposed it.
  • Fed Will Pump $630 Bil Into Money System
  • Citi Mops Up Wachovia With U.S. Guarantees
  • Apple Falls 18% on Downgrades
  • Picture of House Democratic leaders after the vote, with Nancy Pelosi and Rahn Emanuel in center
Wednesday, October 1, 2008
(Dow 10,850, S&P 500 1,164, Nasdaq 2,082)
  • Market Rebounds As Congress Retools $700 Billion Rescue
  • SEC Gives 'Fair Value' Guidance
  • Even Good Corporate Borrowers Getting Caught in Credit Crunch
  • Money Market Rates Spike Again: The actual fed funds rate hit 7% overnight - vs the official 2% target - but retreated to 0.5% on added liquidity from the Fed
  • Confidence, Factories Improve in September, above forecast
  • Picture of a trader on NYSE floor working the phones
Thursday, October 2, 2008
(Dow 10,831, S&P 500 1,161, Nasdaq 2,069)
  • Mortgage Rescue Returns To Senate; House Vote Friday
  • Buffett Will Buy $3 Bil GE Stake
  • Factory Index Hits A 7-Year Low: Sept's ISM manufacturing index dived 6.4 points to 43.5, the lowest since Oct. '01.
  • Automakers' Set. Sales Plunge
  • Picture of Army General David McKiernan, commander of NATO forces in Afghanistan stressing the need for more troops and aids
Friday, October 3, 2008
(Dow 10,482, S&P 500 1,114, Nasdaq 1,976)
  • Stocks Fall Sharply On Economic Data, Deep Credit Freeze; Nasdaq Undercuts Mon. Low. 3-month dollar LIBOR rate rose to 4.21%
  • Commodities Eat Dollar's Dust. Gold copper, oil, natural gas and grains all tumbled as investors fled to dollars and Treasuries. The CRB index hit a 1-year low.
  • Wells Fargo Rides Through Crisis After Avoiding Subprime Slime
  • GE Falls 10% [to $22.15!] on Stock Offering
  • Picture of Nancy Pelosi
Monday, October 6, 2008
(Dow 10,325, S&P 500 1,099, Nasdaq 1,947)
  • Rescue Bill Passes, But Stocks Sell Off [to 3-year lows] As Economy Slows; Dow Dives 4% After Vote (263-171)
  • "Markets are not celebrating because although this is good news, it does not signal that the tough times are behind us,' said Hugh Johnson, chief investment officer of Johnson Illington Advosors.
  • U.S. Cuts 159,000 Jobs, A 5-Year High, With Losses Spreading Across Industries; Fed Rate Cuts Seen in Oct.
  • Wells Fargo Targets Wachovia. [The bank] announced a $15.1 bil, $7-a-share deal to buy all of Wachovia, which had agreed on Sept. 29 to sell its banking assets to Citigroup. No federal support needed.
  • Calif. May Ask Treasury For Help
  • Picture of confident-looking Hank Paulson shaking hands with President Bush who looks like he just ate something bitter
The initial rejection of the bailout bill by the House on Monday reflected the unprecedented objection from the general public, who let their Congressmen/women know of their objection by letters, emails, and calls.

The market tanked after the rejection, and the campaign by the supporters of the bill, the media, both mainstream and alternative (i.e. Internet), was unleashed. The main messages of the campaign were:
  • We have to do something.
  • The market will collapse if we don't do something (pointing to the Monday's stock market results). It will be a disaster!
Around this time, even the financial sites that I frequented whose analyses and views I respected started to divide. On one of the sites, the founder of the site was for the bailout, the chief editor was against it. The founder's view was that it would be better to have a cancer and get treated rather than to have a car crash.

It sure feels like we ended up with both; a cancer patient had a head-on collision with a big tree.

Also, even some of the sites with bearish outlook on the market started to say "The stock market will go up on the passage of the bailout bill." So when the market went down on Friday after the bill was passed, it was treated as a "sell the news" event, with the assumption that the market would now go up. Boy we were wrong...

Stay tuned for Part IV.


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