Dow falls 449 points

September 17, 2008 7:13:11 PM PDT
Wall Street's crisis of confidence continued today, taking stock prices down with it.

If the $85 billion government bailout of the insurance giant AIG was supposed to instill confidence in the financial markets, it didn't work.

At Wednesday's closing bell, the Dow Industrial Average had fallen another 450 points -- the seventh worst day on record.

The NASDAQ lost more than 100 points. AIG itself, once a $70 stock is now trading at just more than $2, down another 45 percent from yesterday.

The unprecedented bailout gives AIG time to sell some of its assets to repay the government loan, which carries an 11.5 percent interest rate, and gives the government 80 percent ownership of the company.

With more large companies teetering, the question is, how far is the government willing to go with these bailouts?

That is the question and a lot of people are asking: Where is the bottom? How many more bailouts are we likely to see? And who's next?

Washington Mutual heads the short list of financial institutions in trouble, according to the dean of UC Berkeley's Haas School of Business.

"I think people are looking at WAMU and thinking okay its balance sheet is a little bit weaker than many of the others, they were a little bit more exposed to some of the early shocks, the early hits to their risk," said Haas School of Business Dean, Professor Richard Lyons.

Professor Lyons is also concerned that just talking about who is in trouble makes it worse.

"We do not want to be panic mongers. In many cases in financial markets, you can get self fulfilling effects that do damage to people's lives and their jobs," said Prof. Lyons.

This week, Standard and Poors cut Washington Mutual's debt rating. Shares in the struggling savings and loan fell 10 percent today and 94 percent over the past year.

And as the market plummeted on Wednesday, so did the stocks of the two remaining big brokerage houses Goldman Sachs and Morgan Stanley. Before they rebounded, both fell 20 percent in just a few hours.

"This is a day after they reported really quite exceptionally positive earnings. Yesterday was a very good earnings announcement both from Morgan Stanley and Goldman Sachs so that gives you some indication of just how far the fear and panic is going," said Prof. Lyons.

Professor Jim Wilcox is a former economist with the Federal Reserve. ABC7 News asked him how many more companies he expects to see on the bailout list.

"Of the institutions that have already been in trouble, they had been on people's worry list for quite some time," said Wilcox.

"Any others on the worry list besides Washington Mutual?" asked ABC7's Mark Matthews.

"It may be that there are others, but I don't know of them off hand," said Wilcox.

Wilcox says he's optimistic the economic downturn will bottom out by spring. And the former Fed economist says the government will stop deep financial plunge, but there's a new twist to the housing mess.

As value of homes fall, Wilcox expects people who can meet their mortgage payments won't.

"It's perfectly understandable why someone who bought a home that is currently worth much less than the remaining mortgage balance doesn't see the financial acumen in making more payments," said Wilcox.

As those folks add to the default mess, the mortgage crisis will deepen.

On Wednesday, about $700 billion of investors' money disappeared after a similar hit Monday, meaning more than a trillion dollars is gone from investment accounts and 401K's.

The White House refused to rule out additional private-sector bailouts. For example: the auto industry, another backbone of the economy, is asking for a $25 billion loan.

White House Press Secretary Dana Perino said help would be considered on a case-by-case basis, but that the economy is strong enough to weather the current storm.

"We have a very mixed picture right now, and no doubt, we're going through some challenging times, and it will just take us some time to work through it," said Perino.

But the collapse of Lehman Brothers, the takeover of Merrill Lynch and the failure of Bear Stearns raises the question: Are America's big brokerage houses in too deep to get out on their own?

"The whole funding mechanism of how the investment banking industry works is under question right now. And so they are going to have to adapt to the new realities in financing their businesses in terms of raising capital, having sufficient capital, risk taking and all sorts of things," said Michael Cuggino from Pacific Heights Asset Management. "The business model may fundamentally change in the coming years. So if they go do it along, they'll have to grapple with this new environment."

On that subject, the Wall Street Journal says Morgan Stanley has held preliminary talks on a merger with Wachovia and at least one other bank.


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