Dow Drops 800, Fears of Global Contagion Rise

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WASHINGTON, DC-It was Sept. 29 all over again today: a week ago Monday, equities plunged dramatically when the House of Representatives failed to pass a financial rescue plan that the Bush Administration had been touting as essential to prevent a painful and prolonged downturn. By Friday, the bill, fittingly entitled the Emergency Economic Stabilization Act of 2008, passed both chambers and was also speedily signed into the law. Yet by today the Dow was down more than 800 points–the first time it had breached 10,000 since 2004–with still two hours of trading left to go.

The Dow’s dramatic drop–which in fact began on the day the bill was passed–was fueled with news of government bailouts of Hypo Real Estate and Fortis in Europe over the weekend, but also by a panicked sense that the bottom is nowhere near to be found. Underlining all of this is the suspicion that the government measures being put in place are not helping. “Governments in the US and Europe are just throwing money at this thing, but nothing is moving,” Peter Cohan of Peter Cohan & Assoc., tells GlobeSt.com.

Asia is going to be next, Lawrence Selevan, principal with merchant investment banking firm Chesterfield Faring Ltd., predicts. “But as buyers of these securities, such as China, their impact will be a different freezing of local capital markets because the Bank of China and other quasi-governmental banks will quickly tighten all credit standards except to government sponsored enterprises,” he tells GlobeSt.com.

The government is plunging ahead with the bailout plan in the hopes that it can slow down what is clearly becoming a rapid economic unwinding. The Treasury Department is putting into place the infrastructure it will need to handle the mechanics of the bailout: namely the purchasing mechanisms, valuation methods, and criteria for identifying troubled assets. A great deal of this will be outsourced to Wall Street as Treasury is not equipped to handle it all in house. On Monday afternoon it released the procedures it will use to select asset managers for the portfolio of troubled assets under the rescue plan. Asset managers Pimco, Blackrock and Legg Mason have all signaled they would like to participate, according to media accounts. Meanwhile, Treasury also tapped Neel Kashkari (35), an assistant Treasury secretary for international affairs to head the Office of Financial Stability created in the Act, on an interim basis.

The government also continues to inject huge amounts of liquidity into the financial system. On Monday, the Federal Reserve Bank said it would double its auctions of cash to banks to as much as $900 billion. Specifically, it will increase its 28-day and 84-day Term Auction Facility auctions to $150 billion each this months and next. The Fed will also begin paying interest on commercial banks’ reserves–a power that the Act granted it on Friday. More funds will be available later this week when Treasury auctions $100 billion in short-term debt.

By the end of the week, who knows what will have been introduced–or worse–which dramatic measures taken by the government that the market chooses to ignore. With the former at least, the sky is the limit thanks to the passage of the Emergency Economic Stabilization Act of 2008, which has granted a wide range of new authority to the Treasury, Federal Reserve, and the FDIC.

“The diversity of institutions and markets under stress, and the magnitude and complexity of the adjustment underway, requires that the tools available to policymakers, regulators and supervisors be used in forceful and coordinated ways across regulatory and supervisory agencies in the US and throughout the world,” the President’s Working Group on Financial Markets, notes in a prepared statement in released on Monday. “This will involve moving with substantial force on a number of fronts.”