Disaster Week on Wall Street & World Stock Markets
October 11, 2008
After U.S. congress approved a historic $700 billion government bailout of the battered financial industry on Friday, Oct. 3, and a brief moment of relief, investors focused on their fears again. Panic swept the global financial markets in the past five business days, Oct. 6 to Oct. 10. The result was a drawn-out bloodbath on Wall Street and global stock markets.
For the week, the Dow Jones Industrial Average fell nearly 1,900 points, or 18.2%, its worst week ever. The Standard & Poor's 500-stock index suffered 18.2% weekly loss, its biggest weekly decline since 1933. Markets from Japan to Brazil to Russia tumbled as well.
The current financial crisis began more than a year ago in the United States when lax lending standards on certain home mortgages came home to roost. Foreclosures skyrocketed, mortgage securities soured and financial companies racked up huge losses.
It's worth taking a look back at the tumultuous five days to see what lessons can be drawn and perhaps get a hint of what might come next.
MONDAY, OCT. 6, 2008
Emergency weekend bailouts of European banks caused investors to realize that the credit freeze had gone global.
In Europe, Britain downed 7.9%, Germany 7.1%, France 9%. Emerging markets joined in, with Russia off 19% on Monday
The Dow Jones industrial average fell below 10,000 for the first time in four years, dropping 370 points, or 3.6%.
On expectations of slowing global demand, a barrel of crude traded below $90. By the end of the week, it would be trading under $78.
TUESDAY, OCT. 7, 2008
The Fed took another step toward broadening its role as a lender of last resort by offering to buy commercial paper directly from issuers. Companies and banks that use commercial paper to finance their short-term operations have been starved for cash since money-market mutual funds that usually buy their paper fled to the safety of Treasury bills.
European financial ministers on Oct. 7 proposed increasing deposit guarantees for bank customers to head off runs.
This time it was the turn of the S&P 500 to crash through an historic barrier. It dropped 5.7% to go below 1,000 for the first time since 2003. Meanwhile, the Dow sank 508.
WEDNESDAY, OCT. 8, 2008
The Federal Reserve, the European Central Bank, and four other central banks announced coordinated half-percentage-point cuts in their key short-term interest rates.
Treasury Secretary Henry Paulson hinted at a change in strategy about his $700 billion bailout plan. He indicated that at least some of the money could be used to invest taxpayers' money directly in banks as opposed to sopping up some of their worst assets.
The contagion seemed to be spreading most virulently to Europe. Britain unveiled plans on Oct. 8 to inject up to $88 billion into major banks in return for equity stakes and up to $800 billion to ease liquidity.
Asia got into the act in a big way on as Hong Kong, Singapore, South Korea, and others fell 5% or more and Japan cratered by 9.4%, the biggest one-day loss there in two decades.
U.S. stocks fell for a sixth day, albeit less than on Monday and Tuesday. The S&P 500 fell about 1% and the Dow tumbled 189 more, about 2%.
THURSDAY, OCT. 9, 2008
Iceland's financial system collapsed, and analysts said the national government might have to turn to the International Monetary Fund for assistance. Iceland apparently teetered on the edge of bankruptcy, nationalizing two of the nation's three biggest banks.
In New York, the stock market's decline was picking up speed. Just three days after busting through 10,000, the Dow industrials fell below 9,000 for the first time since 2003. General Motors' shares fell a breathtaking 31%, to their lowest point since 1950, on fears the credit crisis would kill auto sales. The Dow's 679-point decline amounted to a drop of more than 7%.
The credit crisis continued to worsen as banks hoarded cash and refused to lend to each other except at exorbitant rates. The LIBOR, a rate charged by banks on unsecured three-month dollar loans to each other, rose to 4.75% in London.
FRIDAY, OCT. 10, 2008
Stocks fell nearly 10% in Japan and almost as much in Europe, setting the stage for a wild day on Wall Street.
The Dow opened with a breathtaking drop of nearly 700 points and swung 1,000 points from its low to its high before finishing 128 points down, at 8,451.
The week's decline for the S&P 500, 18.2%, only just missed the all-time record 18.6% drop recorded amid the Great Depression, in 1933.
The week ended with talk of a global fix. Ministers of the G-7 industrialized countries met in Washington to discuss a plan to curb the panic.