Where is the US economy headed?

Citigroup Buys Bank Operations of Wachovia


By ERIC DASH and ANDREW ROSS SORKIN
Published: September 29, 2008
Citigroup reached an agreement early Monday morning to acquire the banking operations of the Wachovia Corporation after making a daring bid that pulled the deeply troubled company from the brink of collapse.


Citigroup will pay $1 a share, or about $2.2 billion, according to people briefed on the deal

NEW YORK - Wall Street tumbled Monday, joining a selloff around the world as fears grew that the financial crisis will cascade through economies globally despite bailout efforts by the U.S. and other governments. The Dow Jones industrials skidded more than 300 points and fell below 10,000 for the first time in four years, while the credit markets remained under strain. http://news.yahoo.com/s/ap/20081006/ap_on_bi_st_ma_re/wall_street

“There is no liquidity anywhere,” one hedge fund manager told me. “No lending available. No interbank lending available. The fixed-income market is completely shut down. There is no activity going on anywhere.” (He asked me not to use his name because he didn’t want to spook his investors.)

The Federal Reserve announced yet another enormous injection of liquidity into the system Monday morning, saying it would make as much as $900 billion available. “What the Fed said was that it wasn’t just opening the window,” said Daniel Alpert, managing partner at Westwood Capital. “It is taking out the window sill and chipping out the bricks around it.”

The Fed’s move was barely noticed. Now there’s talk of another intervention by the Federal Reserve to help thaw the frozen credit markets by buying up short-term commercial debt.

“What I am worried about with all these bailouts,” said the great Wall Street historian Ron Chernow, “is whether they are going to eventually tax the resources of the federal government. The numbers are already getting very, very large. What is especially scary and unsettling is that even actions of this magnitude have not seemed to restore confidence. Each time, you thought that would be the one to stop the contagion. It hasn’t happened.”

This panic is taking place in such a compressed time frame that it is just astonishing. Mr. Chernow pointed out that while the stock market crash of 1929 took place over three brutal trading days in October 1929, it took nearly three years to reach bottom. By then, stocks had lost a shocking 89 percent of their value.

This crisis, by contrast, seems to be moving at hyper-speed " one day it is Lehman Brothers, the next A.I.G., the day after that Washington Mutual. This crisis doesn’t wear you down over time. It hits you over the head with a two-by-four. On a daily basis

Another reason is that certain ominous dates are fast approaching. One is Oct. 23, when the auction will take place to settle the credit-default swaps relating to the Lehman bankruptcy. I saw one estimate that the amount of money firms will owe each other could be as much as $400 billion. Why? Firms that insured against the risk of a Lehman default are going to owe billions to other firms " but they’ll want to collect from the firms with whom they laid off the risk. And so on down the line. The upshot is that many firms are not going to have the money to pay off the insurance claims they owe, and they are likely to be ruined.

In opening the door to rate cuts, Bernanke is departing from the view he and other Fed officials had expressed until recently that lower rates would likely have little effect in boosting economic activity while credit markets are frozen.

Bernanke said the economy is poised for subdued growth during the remainder of this year and into next year. Financial turmoil is likely to extend the weak period and increase risks to growth, he said.

hawkeye, I've been "eyeing" the DOW from many decades ago. You just can't look at graphs and charts to analyze what happens today, or what to expect in the future. The world economy is much different today than the economy of a decade ago or longer. It's not the same; and any analysis must look at the macro economics of our country and the world's. Your numbers do not do this from my interpretation of your analysis. However, I must admit that mine are only a "guesses." One of the most important lessons about any economy is nobody really knows what the markets will hold for the future - short term or long term; if they did, most people would be making money instead of losing - like the pension's loss of 2 trillion dollars from this downturn.

Humans do not learn from the lessons of history, and don't expect future generations to learn from history. Wars and economic cycles will be with humanity like men and women.

WASHINGTON " Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.

The Standard & Poor’s index of 500 stocks is down 22 percent since the end of September, and 42 percent since it peaked a year ago.

It may be time to try a new approach, and perhaps to abandon the announced details of the bailout plan passed by Congress with such difficulty only a week ago. The government needs to decide which banks it is sure are worth saving, and pump capital into them directly.

Treasury Secretary Henry M. Paulson Jr. indicated this week that he was considering such an approach, which would be much simpler and could be much more effective.

The announced plan for the bailout package was for the government to buy up dubious assets from banks, paying more than they are worth now but less than they are expected to be worth later.

If that is completed, banks will get cash " $700 billion or more. But their net worth will rise only to the extent the government overpays for the assets. Pricing those assets will be anything but easy, and the expectation of the government program has further frozen those markets. No one wants to sell until they can find out what the government will offer.

The alternative is to go in the direction Britain went this week. The government could use the $700 billion, or at least a large part of it, to buy preferred stock in banks.

The government could be selective in deciding which banks get the cash, and it could impose conditions on those that seek the money. Those banks could be required to come clean about the risks that they have taken in dubious assets, and to write those assets down to what a willing buyer would pay now.

With that information, the government may decide to let some banks fail. But the others, in which the government does invest, would have a government seal of approval that was backed up by cash.