Saturday, September 20, 2008

Rescue Efforts Drive the Market Higher - Paulson and Bernanke in Control

When U.S. Treasury Secretary Henry Paulson walks in a room, I would guess that most people perk up and listen now. Two weekends ago, Paulson engineered the bailouts of Fannie Mae and Freddie Mac. He then went on to explain how he did not take the use of taxpayers' money lightly. Last weekend, he tried to push through a buyout of Lehman Brothers before that fell apart - because he would not use taxpayer money.

This week, when the market seemed its bleakest on Wednesday night, Paulson together with Federal Reserve Chairman Ben Bernanke and SEC Chairman Christopher Cox, decided they had better get going. It all started Thursday morning, and the follow through continued on Friday with sweeping government measures to rescue the financial system and restore confidence in shaky markets. By the end of the week, Paulson and Bernanke had designed the most dramatic changes on Wall Street since the Great Depression.

In another extraordinary action, the United States joined the United Kingdom in temporarily banning bets that financial stocks will fall (short sell), while the Federal Reserve said it will use $50 billion to back money-market mutual funds. Short sellers, who profit when stocks fall, have been blamed for contributing to the demise of Lehman Brothers and the steep declines in other financial stocks this year.

The moves came at the end of an agonizing week for Wall Street, in which Lehman Brothers filed for bankruptcy, insurer AIG was bailed out by the government and Merrill Lynch merged with Bank of America. Investors had worried that the confluence of crises severely threatened the stability of the U.S. economy.

The Dow closed up 368.75 points (3.35%). The S&P 500 advanced 48.57 points (4.03%). The NASDAQ shot up 74.80 points (3.40%). The benchmark S&P 500 index had its biggest two-day rally since October 21, 1987, two days after the 1987 stock market crash.

Shares of Washington Mutual (WM) surged 42.1% to $4.25 after the Wall Street Journal reported that Citigroup was considering making a bid for the U.S. savings and loan. Citigroup shares leaped 22.7% to $20.65.

Shares of Morgan Stanley, punished earlier this week as investors fretted about the outlook for the last two remaining U.S. investment banks, jumped 20.7% to $27.21. Shares of rival Goldman Sachs climbed 20.2% to $129.80.

Morgan Stanley's talks with Wachovia Corp, China Investment Corp and other institutions continue, a person familiar with the matter said, though the rebound in its securities gives the investment bank more time to consider its options. Wachovia's stock surged 29.3% to $18.75.

Trading was heavy on the New York Stock Exchange, with about 3 billion shares changing hands, far above last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 3.8 billion shares traded, also trouncing last year's daily average of 2.17 billion.

At the end of the highly volatile week when stocks moved by over 300 points on 4 out of 5 days for the first time ever, the market was essentially flat. It may be flat, but coming from where the market sat on Wednesday night, the move and sentiment change has been dramatic.

Say what you want, Paulson and Bernanke are two men that are definitely trying to drive the market, economy, and complete financial system in the right direction.

Source: Reuters

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