Stupefying. Dizzying. Deeply unsettling. The panic that swept the global financial markets in the past five business days, Oct. 6-10, will go down in history—either in its own right or possibly as a prelude to something worse.
The Standard & Poor's 500-stock index suffered its biggest weekly decline since 1933, and markets from Japan to Brazil to Russia tumbled as well (BusinessWeek, 10/9/08). What exactly happened, and what does it mean? It's worth taking a look back at the tumultuous five days to see what lessons can be drawn and perhaps get a hint of what might come next.
MONDAY, OCT. 6: No Bailout Bonus
President Bush's signature on a $700 billion plan to buy unwanted assets (BusinessWeek.com, 10/4/08) from banks was supposed to restore confidence to the markets. But emergency weekend bailouts of European banks caused investors to realize that the credit freeze had gone global. The Dow Jones industrial average fell below 10,000 for the first time (BusinessWeek.com, 10/6/08) in four years, dropping 370 points, or 3.6%. After the market closed, Bank of America (BAC) said it would cut its dividend in half and raise $10 billion by selling shares. BofA CEO Kenneth Lewis said, "These are the most difficult times for financial institutions that I have experienced in my 39 years in banking."
The only good news: Speculators who were reviled during oil's runup got busy driving oil back down, on expectations of slowing global demand. A barrel of crude traded below $90. By the end of the week, it would be trading under $78.
TUESDAY, OCT. 7: The Fed's Paper Chase
This time it was the turn of the S&P 500 to crash through an historic barrier. It dropped 5.7% to go below 1,000 for the first time since 2003. Federal Reserve Chairman Ben Bernanke said the economy was under "extraordinary stress" and hinted an interest rate cut was likely soon.
The Fed took another step toward broadening its role as a lender of last resort by offering to buy commercial paper (BusinessWeek.com, 10/7/08) directly from issuers. Companies and banks that use commercial paper to finance their short-term operations have been starved for cash since money-market mutual funds that usually buy their paper fled to the safety of Treasury bills.
WEDNESDAY, OCT. 8: Central Banks United, to No Avail
In a bid to demonstrate their united resolve, the Federal Reserve, the European Central Bank, and four other central banks announced coordinated half-percentage-point cuts in their key short-term interest rates (BusinessWeek.com, 10/8/08). Ordinarily such a power move would send markets soaring. Not in this crisis. U.S. stocks fell for a sixth day, albeit less than on Monday and Tuesday.
Confronted with skepticism about his $700 billion bailout plan, Treasury Secretary Henry Paulson hinted at a change in strategy. He indicated that at least some of the money could be used to invest taxpayers' money directly in banks—as opposed to sopping up some of their worst assets. Still, the S&P 500 fell about 1% and the Dow about 2%.
THURSDAY, OCT. 9: We've Lost Iceland
Iceland's financial system collapsed (BusinessWeek.com, 10/9/08), and analysts said the national government might have to turn to the International Monetary Fund for assistance.