Fed’s intervention revives Wall Street
NEW YORK – One of the most tumultuous weeks in the 216-year history of Wall Street closed with a dramatic two-day rally as investors celebrated an unprecedented government plan to cleanse banks of the bad mortgages that touched off a crisis in world finance.
Investors snapped up stocks in hopes the end of the credit crisis was near.
The Dow Jones industrials shot up about 370 points, giving them a two-day gain of about 780. The week also included a drop of more than 500 points on Monday and nearly 450 points on Wednesday.
You would never have known it from the anxiety that gripped Wall Street and Washington, but stocks ended the week virtually unchanged, with the Dow Jones industrial average down 33.55 points for the week, or 0.3 percent. The Dow stood at 11,388.44 after Friday’s trading, up more than 3 percent for the day.
The Treasury extended an $85 billion loan to insurer American International Group. The government prepared to take over untold billions in toxic mortgage assets and placed a $50 billion safety net under money market funds. Regulators banned some short-selling. Of the five major U.S. investment houses in existence at the start of the year, two remained intact and independent.
“This was like trying to put a wildfire out,” said David Resler, chief economist at Nomura Securities.
On Friday, bond prices tumbled after investors rushed back into stocks from the relative safety of Treasury securities. The increase in the yields of bellwether two-year bonds meant investors think the economy is fundamentally stronger than it seemed Monday and they don’t see a rate cut soon.
Still, some were skeptical of the intervention.
“This is the biggest travesty the federal government has ever gotten involved with,” said Jay Brew, chief bank strategist at M. Rae Resources Inc. “This is just going to lead to a much deeper and prolonged recession.”
It wasn’t clear how much the latest rescue would cost. Speaking to reporters, Treasury Secretary Henry Paulson said the proposed relief program for troubled mortgage assets must be large enough to have an impact while protecting taxpayers as much as possible.
“I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion,” Paulson said.
Some people scratched their heads and questioned why Wall Street was being bailed out for risky bets it had earlier made profits on.
John Santisteban of Atlanta, a 58-year-old salesman for a security system company, said the government should ask for something in return from financial executives. “All their bonuses should have to be given back as part of the bailout package,” he said.