Snowballing sell-off spreads worldwide
Posted October 10, 2008 8:42 a.m. EDT
Updated October 10, 2008 2:17 p.m. EDT
NEW YORK — Stock prices careened lower Friday in Asia and Europe and gyrated wildly in the United States, extending a stampede of selling that began on Wall Street a day earlier and deepening a global financial crisis that has defied all efforts to stop it.
President Bush tried to reassure Americans afraid for their life savings and their jobs. "Anxiety can feed anxiety," Bush said Friday, "and that can make it hard to see all that is being done to solve the problem."
This week's coordinated interest rate cuts by the world's central banks to thaw frozen credit markets and boost investor confidence have fallen flat as markets remain gripped by fears about the scale and depth of the likely global recession.
Stock prices were swinging sharply on Wall Street. The Dow Jones industrials fell nearly 700 points soon after trading began, regained all of that deficit temporarily – then slid to a loss of more than 300 points shortly after Bush's remarks.
Mike Walden, an economist with North Carolina State University, said fear is driving the market instability.
"This gets into psychology now, (and) the fundamentals are thrown out the window," Walden said. "People are scared. ... Many investors don't understand what's going on."
The Wall Street Journal reported that government officials are considering temporarily guaranteeing all U.S. bank deposits and billions of dollars of bank debt, in addition to possibly buying stakes in individual banks. The New York Times also said officials are reviewing a British proposal that also includes repayment guarantees for certain types of loans.
Administration officials told The Associated Press that several financial rescue plans are being reviewed, but no announcements are likely before finance ministers from the seven biggest industrial nations meet Friday in Washington.
"The world is sending an unmistakable signal: We're in this together, and we'll come through this together," Bush said of the international planning.
The $700 billion federal bailout legislation enacted on Oct. 3 cleared the way for the government insurance limit for bank deposits to be temporarily raised from $100,000 to $250,000 in cases where bank or savings and loans fail. That guarantee covered $5.2 trillion of deposits, but another $1.8 trillion is not presently covered, according to the Wall Street Journal.
But a Treasury Department official, who spoke on condition of anonymity because of the sensitive nature of market conditions, said covering all deposits is not now being considered. "We raised the limit one week ago and have no plans to remove the limit," the official said.
A spokesman for the Federal Deposit Insurance Corp., however, didn't appear to rule out the possibility that such a plan might be considered.
The Treasury had earlier requested from Congress authority for the FDIC to change deposit insurance limits to respond to disruptions in the banking system, in addition to the increase to $250,000 that was part of the bailout legislation, FDIC spokesman Andrew Gray noted in a statement.
"We believe that we have significant latitude, in consultation with Congress, under the systemic risk exception - which carries the threshold of approval of the Federal Reserve and Treasury Secretary in consultation with the president - to protect depositors and adopt other measures to support the banking system," Gray said.
Thursday's anniversary of the U.S. stock market peak turned into one of the worst days in Wall Street history, with the Dow Jones industrials loosing a breathtaking 679 points, or 7.3 percent.
Asian markets followed Wall Street's cue, as key market gauges dropped 9.6 percent in Japan, 8 percent in India and 7.2 percent in Hong Kong. European stocks slumped by midday with key market barometers losing 7.3 percent in London, 7.7 percent in Germany and 7.5 percent in Paris.
A stream of selling forced exchanges in Austria, Russia and Indonesia to suspend trading, and the rout in Australian markets caused traders to call it "Black Friday."
"Overall it's the fact that despite the huge firefighting efforts of central banks worldwide we still haven't seen any thawing of interbank lending that is going to be causing the most concern now," said Matt Buckled, a dealer at CMC Markets in London.
The late burst of selling Thursday on Wall Street sent the Dow Jones industrials down to 8,579, crashing through the 9,000 level for the first time in five years and wiping out $872 billion of investment value.
As bad as the day was, even worse was the cumulative effect of a historic run of declines: The Dow suffered a triple-digit loss for the sixth day in a row, a first, and the average dropped for the seventh day in a row, a losing streak not seen since 2002.
"Right now the market is just panicked," said David Wyss, chief economist at Standard & Poor's in New York. "Nobody wants to take on any risk. Everybody just wants to get their money and put it under the mattress."
Thursday's sell-off on Wall Street took place one year to the day after the Dow closed at its record high of 14,164. Since that day, frozen credit, record foreclosures, cascading job losses and outright fear have seized the market and sapped 39 percent of its value.
Paper losses for the year though Thursday add up to an staggering $8.3 trillion, according to preliminary figures measured by the Dow Jones Wiltshire 5000 Composite Index, which tracks 5,000 U.S.-based companies representing almost all stocks traded in America.
Walden said investors willing to ride out the market could eventually turn a tidy profit by buying stock in sound companies that have been beaten down by the volatility.
"There are a lot of what looks like tremendous bargains out there," he said.
It was the second straight day that Wall Street was rocked by a final-hour sell-off, but this one was particularly shocking.
Most of the day was relatively calm, and the trading floor was quieter than usual because of the Jewish holiday of Yom Kippur. Wall Street awoke to news the federal government was brandishing a new weapon against the financial crisis - considering seeking an equity stake in major U.S. banks in order to stabilize them.
But that step appeared to be as ineffectual as the others Washington has rolled out in recent weeks, including a $700 billion bailout of the financial industry, a coordinated interest rate cut by central banks around the world and direct lending by the Federal Reserve to private companies to provide them with short-term cash.
Acquiring a stake in the banks would be yet another startling intervention by the government in the free market, but economists said Bush was left with little choice because of the credit markets, where tight lending has choked off the everyday cash that is the lifeblood of the economy.
"In normal times, this would be out of the question, but in the present dire situation, I think the government should be employing all the powers that it can," said Sung Won Sohn, an economics professor at California State University, Channel Islands.
Wall Street has been teetering on the brink of panic for a month now, vulnerable to any bad news. Thursday's sell-off was triggered when a major credit rating agency put General Motors Corp. and its finance affiliate under review to determine whether it should be downgraded.
Stock in GM, one of the 30 components of the Dow Jones industrials, lost 31 percent of its value and closed at $4.76 - its lowest level since the Korean War began more than a half century ago.
For the Dow, it has been nothing short of a free fall:
-The point decline Thursday was the third-worst in Dow history. The worst, 778 points, came less than two weeks ago.
-Of the last 19 trading days, there have been 11 triple-digit losses - including the unprecedented six straight. The six gains have all been triple-digits, and only one of them was enough to make up the losses of the day before.
In percentage terms, Thursday's drop in the Dow exceeded the day the markets reopened after the Sept. 11, 2001, terrorist attacks. It was not close to the 22.6-percent decline on Black Monday in 1987, the last stock market crash.
AP Economics Writer Martin Crutsinger reported from Washington. Associated Press writers Tom Raum in Washington and Patrick Rizzo in New York contributed to this story.