The Bailout Watch

September 30, 2008

Fear gripped investors Monday, as hopes of a government bailout for the bruised and battered financial sector were dashed. But then Tuesday, the market jumped up again on hopes of a compromise in the coming days. What gives?

In a stunning defeat of the $700 billion bailout proposal on a 228-205 vote, the Dow fell by 777 points Monday, sparing no stocks in its wake. Credit markets also felt the blow, with banks' overnight lending rates rising and investors fleeing to the safety of Treasury bills. On Tuesday, the market rebounded and made up nearly half of the previous day's decline. To understand the gyrations, you really don't have to look any farther than all the political news that's saturating the airwaves right now.

Democrat and Republican lawmakers bowed to the will of their panicked and angry constituents, just 5 weeks before every seat in the House is up for re-election. Some Democrats wanted more relief for homeowners, and some Republicans wanted less government intervention. Nobody wanted to be politically unpopular in their home district, and that resulted in the gridlock that is oh-so-typical in Washington these days.

But despite the huge drop caused by the uncertainty and panic of Monday, investors really knew in their hearts that something would get done by Congress. So today, even despite more signs of a frozen credit market and there are problems with global liquidity, the market rebounded big on a rare surge of optimism.

As for me, I'm positive Congressional leaders will approve a revised bailout plan— though I won't even go over details of the bill as it stands now, since things are very fluid. But rest assured it will help unclog the global marketplace and improve liquidity, as well as offer up a few do-dads to assuage legislators who are hoping to get re-elected.

But remember, there is no magic bullet that will fix this global financial crisis overnight. Even as the market rallied here in the states on Tuesday, here are some of the events that unfolded on the other side of the Atlantic:

• Belgium, the Netherlands and Luxembourg forked over $16.2 billion to keep retail bank Fortis afloat. The bank had borrowed billions of euros to claim a stake in ABN AMRO, but given the continued tightening of credit, Fortis had to sell its part of that bank to recapitalize itself.
• The U.K. announced that the British Treasury has seized mortgage bank Bradford & Bingley after no private buyer emerged since investors and lenders lost confidence in the group.
• In Germany, the government and a consortium of private banks provided a $51 billion rescue package for massive commercial property lender Hypo Real Estate Holding.
• In Iceland, the government took over the country's third-largest bank, Glitnir, pumping in more than $850 million for a 75% stake in the company. The bank said that since the bankruptcy of Lehman Brothers, the cost of short-term funding has risen to unbearable levels.

You can bet there will be some more rough days ahead, even after the passage of the bailout bill. I know this situation is unnerving, but please don't give in to the fear—recent events are just the painful but necessary steps for the world to recover from the credit crisis. When the dust settles and the distractions are gone, the market will have some much-needed stability.

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