Published November 14, 2008

Fear grips Wall St as Treasury changes tack

US government abandons original bailout plan to leave investors baffled, markets battered

By ANDREW MARKS
NEW YORK CORRESPONDENT
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THE bear tightened its grip to choking point on Wall Street on Wednesday, sending major stockmarket indexes tumbling more than 4 per cent as the US Treasury Department announced an abrupt shift in focus of its US$700 billion bailout effort for American financial companies.

The government's new plan - which will include offering non-bank consumer lenders access to the emergency funding and US$50 billion of the bailout funds for a direct lending programme to consumers to be run by the Federal Reserve - set off turmoil in the stock market. It came on the heels of bad news from the corporate sector, as Macy's and Best Buy announced worse-than-expected earnings and reduced outlooks for 2009.

The numbers on Wednesday put a grim exclamation point on a third consecutive day of losses that have sunk the major indexes nearly 10 per cent. The Dow Jones Industrial Average lost 411.30 points, or 4.7 per cent, to 8331.24; and the S&P 500 gave back 46.65 points, or 5.2 per cent, to 852.30. The Nasdaq slid 81.69 points, or 5.2 per cent, to 1,499.21.

Asian stocks also tumbled following Treasury Secretary Henry Paulson's announcement. Tokyo plunged 5.1 per cent, Hong Kong also lost 5.1 per cent and Sydney tumbled almost 6 per cent.



Yesterday, stocks opened modestly higher, as investors were pulled between buying into a deeply oversold market, and pushed away by more bad news coming from economic data and company outlooks. The Dow Jones Industrials initially climbed 25 points, or 0.29 per cent, in the first minutes of trading, while the market digested the latest jobless claims numbers, which were above 500,000 for the first time in seven years.

Weaker-than-expected guidance from Intel as well as from retail bellwether Wal-Mart - which followed even gloomier outlooks for the fourth quarter and the coming year from Macy's and Best Buy on Wednesday - was also weighing on investors and defeating the market's attempt to bounce back. At 10am in New York, the Dow had reversed course, losing 20.5 points, or 0.24 per cent, to 8,262.

'I think we're set up for another oversold rally by the afternoon, but once again it won't be anywhere near enough of a bounceback to regain the losses of the last few days, or even of Wednesday,' said SG Cowen trader John O'Donough. 'That's just a sign that we remain in the grips of a bear market - a lot of volatility, but the trend keeps pointing down,' he said.

Mr Paulson's announcement - that the government was completely abandoning its original strategy of utilising the US$700 billion bailout package to buy banks' toxic mortgage assets in favour of one aimed more at directly helping consumers instead of the financial companies - rattled Wall Street.

The new strategy came in response to the banks' continued unwillingness to lend money despite massive injections of capital from the Treasury Department, which thus far amounts to US$290 billion.

'The appearance of a lack of certainty on the part of Paulson is adding to the pressure of relentless bad news on earnings,' said Jim Awad, managing director of Zephyr Management. 'On Wednesday, we saw investors voicing their worry that despite the massive government interventions to prop up the banks, the credit markets are still frozen for the most part,' he said.

Deepening the short- term gloom, said analysts, is the sense that the worst could be yet to come. 'The Obama bounce has faded given poor economic news, weak corporate earnings guidance and new worries around various events such as auto industry bailouts, and Chinese and Russian concerns,' noted Citigroup chief investment strategist Tobias Levkovich.

The sense that financial companies remain imperilled was not helped by published reports that American Express, which on Monday became a bank-holding company and thus eligible for funds from the Federal Reserve, was attempting to get US$3.5 billion in capital injection from the government.

'We're not at panic levels yet, but we're close,' said Mr Levkovich, who believes that stocks have yet to reach their bottom.

'People are having to ask themselves how much worse things are going to get in the economy if the system they thought was at least being repaired enough to start things going again appears to be nearly as fragile as it was a month ago,' said Mr Awad.