It's bailout or bust for the markets in the coming week.

But as soon as Congress decides how to structure a rescue package, the big headache for investors will be the economy and the impact the credit crunch is having on an already weakened landscape.

There is a heavy calendar of economic data expected, including the important September employment report, due Friday. It is also the end of the third quarter, and analysts expect to hear preliminary comments from companies on their results, ahead of earnings reporting season in October.

"We've churned in the last month because of all this uncertainty out there. The bailout plan is only part of it," said Tobias Levkovich, Citigroup's U.S. equities strategist.

Levkovich said investors have been spooked by the the failures and concern about failures of financial institutions, among other issues. On Thursday, J.P. Morgan bought Washington Mutual deposits, branches and assets for $1.9 billion in an FDIC-brokered deal that wiped out shareholders.

On Friday night, newspapers reported that Wachovia was back in takeover talks, this time with major banks. It had been in merger talks with Morgan Stanley . Wachovia's stock had been down sharply in Friday's session.

The market has been struggling with each news development around Congress' consideration of the $700 billion bailout plan, proposed by Treasury Secretary Hank Paulson more than a week ago. Paulson proposed the government use the billions to purchase toxic debt from financial firms.

"The volumes have been lighter in the markets so clearly many investors have been sitting back and waiting. While we've had these big swings in the Dow, it's not really where a lot of investors have been focusing," he said.

He expects to see a lot of investor attention on earnings, especially as companies begin to warn in the coming week about the third quarter and future outlook.

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"We have to get past this earnings uncertainty. This bailout issue won't be going on for weeks. That's not going to happen. There'll be an adjustment and we'll move on," he said. If the plan is not approved, "there'll be a plan B or plan C and we'll move on," said Levkovich.

Levkovich also believes there is uncertainty around the presidential election , and when that is over, there could be some relief buying, regardless of the outcome.

Levkovich currently has a target of 1475 on the S&P 500, but he is not optimistic the market will actually get there by year end. "It's asking a lot to run 250 points from here. I'm not ruling it out that it can't happen given the right circumstances. I just don't believe everything's going to right," he said.

JPMorgan U.S. equity strategist he thinks the stock market will focus on the bailout plan and then on liquidity. "Equity investors have responded to worsening liquidity conditions by raising cash balances," he wrote in a note. He said hedge funds have also been raising cash in anticipation of Sept. 30 redemptions.

Markets Mayhem

The Dow fell 2.2 percent or 245 points to 11,143 this past week. The S&P 500 was down 31.71, or 3.3 percent at 1213.

Patrick Kernan, a principle with Cardinal Capital, said from the shape of things Friday, it looks like the market is set for another couple of weeks of high volatility. Kernan trades S&P 500 futures and he said a popular trade shows some big institutions expect the S&P to move about 80 points in either direction in the next couple of weeks.

The VIX, a measure of volatility, stood close to 36. "Twenty-five was a very big level for us. 30 was very high and 35...we're looking at levels we haven't seen since 9-11 for the most part. This is extremely high for us. We haven't seen sustained volatility like this where we're hovering at these levels since Long Term Capital," he said.

But it was the credit markets where some of the biggest action was. Spreads between Treasurys and all other types of credits were at record levels, after reaching a near panic level Wednesday and Thursday. Short-term T-bills were the investment of choice and investors watched rates fall to micro levels as buyers poured in. Two-year swap spreads shot up above 160 basis points during the week but were off highs at the end of the week.

The deep chill in credit markets has grown increasingly worse since the failure of Lehman Brothers , which continues to send ripples across markets. The focus now is on Washington and whether a bailout plan that works to fix frozen credit markets is possible.

Morgan Stanley Credit Strategist Greg Peters said the credit markets by the very end of the week were holding up a bit better than he thought they would given the historic moves. The markets "still have confidence something will be passed that's a workable solution and things will settle down, but nonetheless you are still seeing a lot of stress and strain in the lending markets at the short end. There's a long road ahead of us."

"The flow of credit has just completely stopped and so it takes some time to manifest itself vis a vis the (economic) data. What you're seeing is corporations are having extremely hard times rolling commercial paper. They are tapping bank lines so that is constraining the already constrained banking system. Banks are hoarding cash. They're not lending to each other," said Peters.

Peters said the credit situation is already making a weak economy worse. "This is a scenario we laid out in November—except on steroids. It's much worse than we thought. The flow through to the consumer and economy is worse than we thought...We just need a strategy to get out of it. Monetary policy in and of itself is ineffective. There has to be an alternative solution," he said.

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The dollar fell 1 percent against the euro in the past week. Oil moved higher in the past week, gaining 4 percent to $106.89 per barrel. Gold gained 2.6 percent to $882.90 per troy ounce.

Econorama

In the coming week, the September jobs report is particularly key but there is a heavy calendar of important data. On Monday, personal income is reported. Tuesday's data includes Chicano purchasing managers and consumer confidence. The widely followed S&P Case/Shiller home price index is also released that day.

On Wednesday, ADP's private sector employment report is released, as is ISM manufacturing data. Construction spending and the auto industry's monthly sales reports are also that day. On Thursday, weekly jobless claims and factory orders are reported.

The jobs report is released Friday and is expected to show a loss of 105,000 non-farm payrolls and an unchanged unemployment rate of 6.1 percent. ISM non manufacturing data is also released that day.

Earnings Central

There are a few earnings reports in the coming week. Circuit City and Walgreen report Monday. Mosaic and Micron report Wednesday, while Marriott and Constellation Brands report Thursday.

- Questions? Comments? marketinsider@cnbc.com

Wall Street's wild ride promises to continue as Congress wrangles over details of a financial markets bailout, and investors assess the government-brokered deal for Washington Mutual.

JPMorganChase stepped in to acquire Washington Mutual's deposits, branches, and other assets for $1.9 billion after the FDIC seized it, sources tell CNBC's David Faber.

Troubled Washington Mutual, the biggest U.S. thrift, was rumored all day Thursday to have been floundering and out of options in its quest for a buyer.

Washington Mutual stock holders and debt holders were wiped out in the deal, but branches will be able to open for business as usual Friday, reports Faber.

On Friday, investors will be watching the fallout from this deal, which leaked out ahead of a 9:15 p.m. ET JPMorgan conference call Thursday.

There's little data to watch Friday, but the final second quarter GDP is released at 8:30 a.m. and consumer sentiment is reported at 10 a.m.

Markets Mayhem

Credit markets continued to show serious signs of stress Thursday but were slightly less severe than Wednesday. Selling in the two-year Treasury pushed its yield higher, to 2.169 percent, and T-bill yields rose from Wednesday's ultra-depressed levels as the intense buying calmed. But Libor/OIS spreads were at record highs and spreads in general remain near records. The big fear in credit markets is that the government bailout may not work.

Stocks though moved higher on optimism Congress was near agreement on a plan but that seemed to unravel later Thursday . The Dow rose 196 or 1.8 percent to 11,022 while the S&P 500 was up 23 points, or 2 percent, at 1209.

The $700 billion rescue of the financial system is expected to be adopted in some form or other but markets will be nervous until it looks like a deal will be struck. Traders have been watching every step of the process because it will impact the very structure of Wall Street as it strips toxic debt from the books of financial firms. Some additions to the Treasury plan being discussed on Capital Hill include caps on the compensation for CEOs and the potential equity ownership in financial companies by the government.

In the meantime, the stock market has been seeing sharp swings higher and lower this week. Birinyi Associates president Laszlo Birinyi said the volatility in stocks is not surprising.

"I think it just reflects the uncertainty and the fact that we're hoping and we're scared at the same time, depending on which day. It reflects the fact that the market today has more people with a short-term investment orientation," he said.

Birinyi said the temporary ban on short selling has also resulted in increased volatility in some stocks included on the list. "Every measure of volatility we've ever known has had a significant increase," he said. But for some stocks that were included in the short sale ban, intraday volatility has become extreme.

I asked Birinyi whether the intense triple digit swings in the Dow mean anything for stocks going forward (like a bottom forming). He said not necessarily. "We are kind of reminiscent to the end of 2002. We made a bottom. We struggled and went back and forth before we went significantly higher. My view is we're groping for a bottom."

Minus another negative event, "I don't think we're likely to go much lower. I think the worst is behind us," he said. Birinyi pointed out the action in General Electric , the parent of CNBC. The company issued an earnings warning, but it's stock moved higher. "I think the action is very positive," he said. "... It's the fact that people are really looking forward."

Oil Drill

Energy moved higher, but other commodities mostly moved lower Thursday. Oil gained $2.29 per barrel, or 2.2 percent to $108.02 per barrel. The dollar fell 0.04 percent against the euro.

"The tightness in the gasoline market is pushing oil up," said John Kilduff, senior vice president at M.F. Global.

"I guess it's (oil) at the upper end of the trading range. That's my feeling," said Kilduff, a CNBC contributor. He said the oil market should start responding to concerns about the U.S. economy once the bailout package is adopted. "The economy is going to weigh on things globally too," he said.

Main Street

Duke Energy CEO James Rogers told CNBC's Maria Bartiromo that he is seeing residential customers cut back on electricity use, meaning they pared back their air conditioning and other use this summer.

"The Main Street economy has been very resilient in the last three to five years. This melt down on Wall Street is starting to infect Main Street and that's why action today is so critical by Congress," he said on "Closing Bell" Thursday.

Questions? Comments? marketinsider@cnbc.com

It's never pretty on Wall Street when the action in Washington rules the markets.

That's certainly been the case this week, while Congress wrestles with the merit and shape of the $700 billion financial markets rescue package, proposed by Treasury Secretary Hank Paulson. The bailout debate promises to be the dominant theme for markets again on Thursday though the hearings with regulators have ended.

Warren Buffett said we were on the "brink" last week.

That's pretty scary when you look at the unsettled nature of credit markets yesterday and again today, as Congress wrestles on hours of live television with the request to save Wall Street from itself.

But frankly, the scary thing is it's not just Wall Street being saved. It's all of us on Main Street being rescued from the ruins created by a loosely regulated, runaway finance system that allowed Main Street's businesses and homeowners alike to happily take on more debt than they could handle. That lending ultimately landed on the books of banks and brokers, as unwieldy, unmarketable piles of bad debt.

Perhaps Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson were just not clear enough in sending that message yesterday.

But today, Bernanke was pretty direct when he testified before the Joint Economic Committee. And it feels like the pendulum is about to swing the other way. It seems likely Congress will approve some form of plan but with plenty of strings attached.

Michael Darda, chief U.S. economist with MKM Partners, said he thinks Bernanke and Paulson have done just about as well as they could do under the conditions. But he said the markets reaction still shows they are not sure the problem will be fixed.

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"I think that at this point the markets are just not convinced that what's being talked about is going to be effective or that political wrangling is going to let it get through...or both," he said.

Darda, in a note today, said credit markets took a turn for the worse with LIBOR/OIS rate widening this morning to a record 164.7 bps and the two year swap spread widening out to 143 bps, moving closer to levels it saw in the peak of panic last week. By mid-afternoon, the two-year swap was above 160 bps, a record level.

"The asset-backed commercial paper market has been turned upside down, suggesting the credit crunch is deepening," wrote Darda. Asset-backed commercial paper funds credit cards, auto loans, and short-term working capital for businesses. It's at the very heart of the financial system.

He noted that the asset-backed paper was under intense stress, with spreads on three-month paper vs Treasurys widening to 400 bps this morning after having narrowed temporarily from an all-time high above 500 bps last week.

The flight-to-quality trade into T-bills continued bills yielding micro levels. The stock market, meanwhile, drifts around on light volume. "We're much better to sell today," said one trader.

Darda says we'll face a bad economy no matter what the outcome. "We're at a point where the impact on the real economy could be very dire if something's not done so anyway you slice it the real economy is going to get worse before it gets better...I think people are nervous. The fact is there's already a recession that is in train here," he said in a phone interview.

Darda also pointed to the Fed's flow of funds report for the second quarter which showed household borrowing fell below net acquisition of financial assets for the second consecutive quarter after nine years of "deficits."

"It's good in the longer term but in the near term it means you have a consumer recession. The last time we had one of those was in the early 90s," he said.

"The best case scenario is we see recovery in the second half of next year and even with that it's going to be a mild one. It's going to take awhile to get out of these issues even if the bail out succeeds," he said.

What else did Buffett say? He said the bailout has to pass and succeed. That's why he made an investment in Goldman Sachs . (But, of course he structured his $5 billion investment in Goldman preferred to assure that his downside risk is limited)

"Last week we were at the brink of something that would have made anything that's happened in financial history look pale," Buffett said on "Squawk Box." "We were very, very close to a system that was totally dysfunctional and would have not only gummed up the financial markets, but gummed up the economy in a way that would take us years and years to repair. We've got enough problems to deal with anyway. I'm not saying the Paulson plan eliminates those problems. But it was absolutely, and is absolutely necessary, in my view, to really avoid going over the precipice."

Questions? Comments? marketinsider@cnbc.com

Warren Buffett is driving the latest ambulance to show up on Wall Street, and his first aid may in fact give a boost of confidence to the market and Washington's rescue process.

All kinds of worry about the financial bailout package is rippling through markets as regulators head to the Hill for a second day Wednesday.

Late Tuesday, Goldman Sachs revealed that it struck a deal with Buffett's Berkshire Hathaway to take a stake in the firm through preferred shares and warrants.

Berkshire receives a preferred stock with a dividend of 10 percent. It is callable at any time at a 10 percent premium. In conjunction with the offering, Berkshire Hathaway will also receive warrants to buy $5 billion of common stock with a strike price of $115 per share, are exercisable any time for a five year term. Goldman also is raising at least $2.5 billion in common in a public offering.

"I thought he swore on the bible he'd never invest in another broker deal!" was PNC's Eugene Stone's first reaction. Stone, chief investment strategist at PNC Wealth Management, has followed Buffett and Berkshire for years. He was referring to how Buffett's investment in Salomon Brothers in the early 1990s soured the investor on Wall Street firms.

"He probably figures what was laid out was the kind of deal he likes. They've (Berkshire) kind of said they'd be happy with a 10 percent return on stocks. He's got 10 percent in the bag as long as they don't go under. Plus, he's got big upside if the stock does very well. It perfectly fits the hurdle that he's thrown out there," said Stone.

Goldman, considered the premier Wall Street firm, would not say how the deal came about but it has had a long relationship with Buffett. "It was an opportunity he clearly found attractive and so did we," said a Goldman spokesman, without elaborating further.

It's interesting to note that Buffett's name has been thrown out as someone who might make sense as an overseer for the financial markets bailout plan. Goldman and rival Morgan Stanley were the last two major investment banks standing this week, and both opted to become bank holding companies, regulated under the umbrella of the Fed.

Buffett may reveal more about how the deal came about when he appears on CNBC's "Squawk Box" Wednesday at 8 a.m.

Watching Washington

Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson will testify on Capital Hill before the House Financial Services committee at 2:30 p.m. Wednesday. Before that, Bernanke appears alone before the Joint Economic Committee for a planned testimony on the economy at 10 a.m. On the data front, existing home sales are reported at 10 a.m.

"The last couple of days Congress has been debating what they're going to do about the Paulson plan. You can just see the financials continue to erode as they wait for the news, and the uncertainty grows again. This should give them a little shot in the arm, as Buffett is thinking there is obviously value. You should see a lift," Stone said.

Tuesday's market drifted throughout the day with a big move down in the final hour. The Dow finished off 161 points at 10,854, taking it down 4.7 percent in two days, it's biggest two day drop since July, 2002. The S&P 500 was off 1.6 percent at 1188, for a two day drop of 5.6 percent. In a reversal of Monday, commodities and oil were out of favor and that pushed their shares down about 3 percent.

Traders closely monitored comments from Senate Banking Committee members who interviewed Paulson, Bernanke and Securities and Exchange Commission Chairman Christopher Cox.

UBS director of floor operations Art Cashin said the market was made nervous by concern there was Congressional resistance to the plan, which includes the purchase by the government of $700 billion in bad debt held on the books of financial firms.

"Now we're going into a night of uncertainty. You never know what Congressman or Senators will say something and people are paring back" positions, said Cashin at the end of Tuesday's market session.

"The whole story is: Deal or no deal?" Cashin said.

Traders fear modifications to the plan may make it less effective. Add that to concerns, the plan won't work at all to unfreeze markets. In Washington, the debate focuses on the cost to taxpayers and whether the plan to purchase mortgage securities will actually heal the market and allow the government to recoup its investment

In a late development Tuesday, NBC News reported that the FBI probe into possible wrongdoing in the mortgage collapse has spread to include preliminary probes into AIG, Lehman, Fannie and Freddie and the issue is possible misstatement of assets.

Market Mayhem

Traders say there's some relief that the two big down moves this week in the stock market have not been on the huge record volume seen last week. They also said missing from the action were hedge funds, many of whom are sidelined for now in a period of uncertainty about the markets and hedging strategies.

Oil's reversal helped the stock market but helped the dollar which recovered some ground, gaining 0.9 percent against the euro. Crude on NYMEX fell $2.76 per barrel or 2.5 percent to a close of $106.61 per barrel. Traders said concern about the health of the economy overshadowed supply concerns. Weekly inventory data is due Wednesday at 10:35 a.m.

Credit markets continue to be constricted as swap spreads widened Tuesday.

CNBC's Rick Santelli points out that Caterpillar's Caterpillar Financial issued $1.3 billion in a two-part debt sale, the first corporate deal to come to market since Sept. 9. The 5-year portion was priced to yield 3.20 percent above Treasurys and the 10-year portion, 3.25 percent above Treasurys.

"They had to ante up in this environment. It's not so much the detail but the message it sends. This is the center piece of Paulson's whole theme here," said Santelli.

Jim Galluzzo, who trades T-bills at RBS, said it was busy on his desk Tuesday as investors looking for safety piled into bills. But it was nothing like the frenzy of last week when the three-month T-bill yield touched near zero. The yield Tuesday though fell below one percent.

Galluzzo said there was a relief trade after news of the Treasury plan initially broke last Thursday. Of Tuesday's action he said: "I don't think it's a panic trade necessarily, but when we're in uncertain times, people try to hide in the shortest possible securities because they're not sure. They don't know what to do," he said.

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Questions? Comments? marketinsider@cnbc.com

The scorching volatility ripping through financial markets is not likely to let up while details of the government's rescue plan are being worked out.

On Tuesday, investors will be looking for further developments in the financial markets bailout and also closely watching the 9:30 a.m. Senate Banking Committee hearing, where Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke will testify.

As Congress wrangles with Treasury over elements of the plan, traders say the markets need a swift resolution. On Monday, stocks sold off sharply after big gains Thursday and Friday. The dollar had one of its worst days in years, and commodities moved higher across the board.

"I think there's a sense of distress with the Democrats," said Cowen's John O'Donoghue, adding there's concern Congress will "hang ornaments" on the legislation. Stocks reacted negatively Monday when Sen. Christopher Dodd said the bailout plan could include government ownership of some financial firm's stocks.

"I think Paulson will stand his ground and get it done," he said.

Market Mayhem

The Dow finished Monday down 372 points or 3.3 percent at 11,015.69. The S&P 500 lost 3.8 percent to 1207, and Nasdaq fell 4.2 percent to 2178. The dollar was trading at $1.4839 per euro, a 2.5 percent decline.Forex.com said the dollar's decline was its biggest one-day fall since January, 2001.

"1175 on the S&P was my kind of downside look," said O'Donoghue. "We may retest the lows here and bounce around for a while. There's no impetus for stocks to go up."

"How weak does the dollar get? That is the question. The dollar's going to be weak because there's a perception this economic house is in turmoil," he said "The Fed can't raise rates. They're going to have to print money like lunatics here to get all this bailed out. I think the alternative to what Paulson did would have been a crushing, crushing recession if not depression. Now I think we have to go through a recessionary environment, but the cataclysmic shutdown of financial markets has been put off."

The financial sector was the worst performing, down 8.5 percent. Goldman Sachs and Morgan Stanley , the last two major investment banks, were the latest financial companies to make headlines with news that they will come under the Fed's regulatory wing and operate as bank holding companies. Morgan Stanley also said Mitsubishi UFJ Financial planned to make an investment of up to 20 percent in the firm. The idea that Morgan would merge with Wachovia has been put aside for now.

PIMCO's Mohammed El-Erain, guest host on "Squawk Box," Monday explained the firms are being what he calls "de-risked."

"What is happening with Goldman is simple. You have to de-risk them and take them under the umbrella of the Federal Reserve. How do you do that? By changing their structure and giving them more access to more funding and by saying they are now going to be run as a 'derisked,' 'deleveraged' entity that is less profitable. That's true, but that's how they are going to navigate forward," he said.

Oil Drill

Oil bubbled sky high Monday in unusual trading. The October crude contract on NYMEX was set to expire Monday, and as it closed, oil shot up to more than $120 per barrel, up 16 percent in its biggest one-day move ever. Traders said there appeared to be a short squeeze in the thinly traded contract, and that there was an effort by some investors to take physical delivery. The CFTC said it was investigating the move.

M.F. Global senior vice president John Kilduff said the November contract could trade starting at around $108 per barrel early Tuesday, which is where it traded Monday. He said there was a short squeeze in the October contract as it expired due to extraordinarily low inventories after hurricanes Ike and Gustav.

"I was looking for $110 equilibrium. as long the dollar keeps getting hammered here, it's going to be supportive," he said.

Wilting Dollar

The dollar's big move down came as currency traders worried there would be a big increase in the national debt and stress on the federal balance sheet from the government plan to buy $700 billion in toxic mortgages and other moves to guarantee money market funds and increase liquidity. J.P. Morgan economists, in a note, said the risk to U.S. public sector finances are being substantially increased. "The total net issuance of public sector debt in the coming fiscal year -- to fund a large deficit and the purchase of distressed assets -- is likely to approach $1.5 trillion, about 10 percent of U.S. GDP."

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"How much of this borrowing is ultimately funded by asset sales will depend in part on how quickly the housing market stabilizes and how well the economy performs," they wrote.

Credit Un-Crunch

Treasurys were mixed in Monday trading. The 10-year dropped 16/32, raising its yield to 3.829 percent while the two-year saw its yield fall to 2.127 percent.

"It seems like a fait accomplis that interest rates are going to go higher, but many traders on the floor say it's not going to be quite so easy. A lot of the initial supply before November's refunding are going to be in short maturities, anywhere from bills to short-term notes, and the sponsorship by the likes of China should continue," said CNBC's Rick Santelli, from the Chicago pits.

John Sprow, senior portfolio manager with Smith Breeden, said while the stock market was getting thrashed, some corners of the credit markets showed signs of life. "The fixed income markets are still taking the positive momentum forward ... Commercial mortgages, subprime mortgages, corporates - they're all up sharply today," he said Monday afternoon.

"The real question is does (the Treasury plan) free up capital to flow through the system. We don't know if that's going to happen yet. What we saw last week was a complete failure of that. I hope I never see a week like last week again. Nobody trusted anyone. Nobody trusted anyone on trades. The whole ability to move money from point A to point B was ineffective," said Sprow.

Sprow believes the Treasury's plan to buy tainted mortgage debt from financial firms has a chance of ultimately returning the Treasury's investment because the government has the ability to wait it out. "I am optimistic it can be done net of their cost," he said. "Assuming my estimates of defaults, it can be done where they make money. The issue is whether people sell at those prices. It kind of sets a floor on prices."

He said the government also has Fannie Mae and Freddie Mac at its disposal and could use them to provide loans for some subprime borrowers.

Still Crunched

Peter Delahunt, senior vice president and national sales manager at Raymond Jamesm, though tells us the municipal bond market, where states and local governments raise money, still has problems. About $6 billion in new issues are waiting to come to market. There's only been one deal of more than $100 million since the week of Sept. 9. The average weekly issue is usually about $8 billion.

As far as secondaries, "Our market is slightly better than last week, only because the large overhang of new product everyday keeps getting postponed," he said. Delahunt said one factor impacting the market is the absence of insurer AIG, which was rescued by the government last week. "The only real institutional buyer in the municipal supply space is property and casualty, and they've been getting hit by claims from Katrina all the way through to Ike," he said.

Questions? Comments? marketinsider@cnbc.com

Concern about the price the U.S. could pay to rescue the financial system is crushing the dollar and raises questions about whether the government could ultimately intervene to prop it up.

"I'm just watching the dollar self-implode," said Brian Dolan, chief currency strategist at Forex.com. "The dollar's clearly been under pressure across the board. This is knee-jerk reaction to what many are perceiving as an explosion in the fiscal deficit and national debt."

While the plan is still being debated, Dolan believes it may end up as a net positive for the government and not the big burden the market is anticipating. The government plans to buy $700 billion in toxic mortgage debt from financial institutions as one in a series of moves aimed at unfreezing credit markets and bolstering the banking system.

"The real number that is likely to be the end result is likely to be more on the order of $100 to $200 billion. That's assuming we lose money on the trade when there's a good possibility we make money on the whole proposition, depending on how deep a discount these are valued at," he said.

At $1.48 per euro, the dollar was down 2.6 percent, its steepest decline against the euro since Jan., 2, 2001. The dollar index was also down 2.6 percent.

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Commodities gained across the board Monday as the dollar tumbled. The most dramatic move was in the oil market, where crude jumped more than $15 to $120, on the last day of the NYMEX's October crude contract. Traders said the record gain was the result of a short squeeze in crude, and a demand for physical delivery as the contract expired.

"This kind of volatility threatens to bring an official response in terms of U.S. dollar buying intervention," said Dolan.

The U.S. Treasury and Federal Reserve have pulled out their financial jumper cables, but it's the details that will determine whether their massive bailout plan will recharge the markets and economy.

In the week ahead, the markets will focus on how the multi-leveled rescue package is taking shape in Washington. A highlight will be testimony from Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson, who appear before the Senate Banking Committee and House Financial Services Committee Tuesday and Thursday, respectively.

Under the plan, the government would take toxic debt from the balance sheets of financial institutions, expand purchases of mortgage debt, and insure money market funds. As part of a series of orchestrated steps, the SEC also moved to stop short selling in financial companies' shares temporarily.

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"We just plugged a hole in our heart," said Diane Swonk, chief economist at Mesirow Financial. "We now have a sense that we're not going to die tomorrow. Now we can focus back on the economy, which is going to get worse before it gets better."

"But at least the light at the end of the tunnel is not a train. It's a light," she said. "We're planting the seeds for 2009.... Now we're going to focus on the real world tonight, rather than panic."

The unprecedented moves to inject confidence back into global markets and U.S. financial institutions comes after a two-week period that saw the harrowing seizure of Fannie Mae and Freddie Mac by the government, the collapse of Lehman Brothers , the governments takeover of AIG , the quickly arranged marriage of Merrill Lynch and Bank of America , and the possible sale of several other major institutions.

For investors, even the most seasoned Wall Streeters, fear was at an all time high and credit markets showed signs of serious stress. The fallout from Lehman's failure rippled through Wall Street, and investors pulled record amounts from money market funds, fearful that they would "break the buck" after high-profile The Reserve's Primary Fund said it was freezing payouts and that investors' dollars were no longer worth a dollar any more.

News of the government's plan to cordon off Wall Street's toxic debt, first reported Thursday by CNBC's Charlie Gasparino, fired up the biggest two-day move in stocks since 1987.

"In 1989 to 1990 to 1991, the government intervention helped provide the bottom to the market. History will show you've never had a major credit crisis end without an intervention," said Richard Bernstein, chief U.S. investment strategist at Merrill Lynch.

Bernstein said without the details, it's impossible to tell what type of market impact there will be from the moves, which started early Thursday morning with news that the Fed had orchestrated liquidity injections around the globe with the cooperation of other central banks.

Bernstein said the rescue package would be bullish if it accelerates consolidation in the financial industry, but if it keeps the status quo, it will not be. He said investors may have prematurely jumped into financial stocks at the end of the past week.

"Unlike most cycles, we didn't get tremendous overcapacity in the manufacturing sector. We don't have idle capacity, bloated inventory. What we do have is overcapacity in the financial sector. This is no different than shutting down factories in a downturn...It's the same thing. We just had a monstrous credit bubble. We should not be surprised to see it," he said.

Swonk said she may change her 2009 outlook based on what the package entails. "We'll probably change late 2009 to be a little more optimistic, because if we get credit markets rolling we'll get a little more activity. It doesn't help the outlook certainly before Christmas. This isn't going to put cash into consumers' hands before Christmas," she said.

Market Mayhem

Traders expect a roller coaster ride in the markets again in the coming week, as more details of the package come to light. The Dow, after a series of triple-digit, stomach-turning moves, finished the week down just 33.55 points at 11,388. The S&P 500 was up just 3 at 1255. Its 9.4 percent move higher Thursday and Friday was the biggest two day gain since October, 1987.

Volume on the NYSE was at a new high, and three of the five days in the past week shattered records.

Traders also point to the fact that the past week contained expirations on Friday, which heightened volatility. The changes to the short-selling rules also no doubt exaggerated the moves in financial stocks.

In the Treasury market, traders there say while the idea of a plan to fix credit markets brought in spreads, it ultimately will result in an increased federal debt requirement and a bigger burden for taxpayers. The 10-year fell 11/32 points for the week to 101-28/32, raising its yield to 3.771 percent. The yield on the two-year rose to 2.136 percent.

The dollar fell 1.5 percent against the yen in the past week, and the dollar fell 1.8 percent against the euro, to a level of $1.4474 per euro. Oil prices, meanwhile, reversed their losing streak and finished the week at $104.55 per barrel, up 3.3 percent. Gold was also up 5.4 percent for the week, to $892.70 per troy ounce.

'Deep Fear'

Former Fed Chairman Alan Greenspan shared his views with CNBC's Steve Liesman on the rescue plan. He said it is necessary, and he is supportive of it.

"The only qualification that is critical is that it be temporary, that after the crisis is over we have to unwind the system. This is a once-in-a century event that required an extraordinary reaction," he said.

"Nobody likes to do something like this but we got to the point where we morphed from a liquidity to a solvency problem," Greenspan said. He said the companies that give mortgage-backed securities to the government should also have to issue warrants to the government, and not just be bailed out.

"Can we solve the financial crises before major negative effects set in? I just cannot answer than question," he said.

Greenspan added, "We went from irrational exuberance to deep fear."

Econorama

Bernanke also testifies on the economy this week, before the Joint Economic Committee on Wednesday.

On the data front, existing home sales for August are reported Tuesday and new home sales are reported Thursday. Weekly jobless claims and durable goods are also reported Thursday. Second quarter GDP and consumer sentiment are released Friday.

Questions? Comments? marketinsider@cnbc.com

Where there was dread, there's now a ray of hope.

At least that's how some traders were talking at the end of the day Thursday, after the stock market rocketed 300 points in the final hour, the mirror opposite of Wednesday's frightening performance.

Going into Friday, traders say there may be some positive follow-through based on the course of news from Washington overnight.

They are looking for follow-up to news -- first reported by CNBC's Charlie Gasparino -- that Treasury Secretary Hank Paulson is discussing a plan to cordon off Wall Street's toxic debt, much like the government did in the savings and loan crises of the early 1990s. This Resolution Trust-like plan is in no way finalized. It is, though, certainly being discussed in Wall Street, Congress and the White House -- and the idea of it was enough to inject a jolt of confidence back into the stock market.
(Contd.)

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CNBC's Companies in the News:
(click on tickers for headlines)

- Morgan Stanley
- Oracle
- AIG
- Wachovia
- Lehman

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Art Hogan of Jefferies said there are two ways to restore confidence when investors are as despondent as they've been this week, watching one financial institution after another fail, get rescued or sold:

"You can do something innovative like this, which is what seems to be happening... They've got a new tool they're going to pull out," he said, noting that the original RTC was a success.

"The other thing is you can get a fireside chat with a strong leader who you believe is behind it, and we haven't had that."

The news came after a day in which the Fed was actively pumping liquidity into financial markets, joining with foreign central banks to pump up confidence around the globe. At the same time, the SEC moved to reign in short selling and the U.K., too, said it was cracking down on shorting.

• CNBC Special Report: The War Against Short-Selling

"It's a very low base to be starting from, so if this is the turning of the tide, the explosive upside is very possible because we spent so much time selling this market down," said Hogan. He said the market was in a pattern of pain, generated by daily expectations that there would be bad news about some financial institution or other.

Morgan Stanley, which is in talks for a possible sale, does not have to be sold, Hogan said. He said its earnings were healthy and it could continue to stand alone if it were not under siege by Wall Street.

Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson are expected to meet with Congressional leaders Thursday night to discuss options, according to CNBC's Steve Liesman. Those developments are being closely watched by traders.

The Dow, meanwhile, finished the day up 410, a 3.9 percent gain to 11,019. The S&P was up 50, or 4.3 percent, at 1206.

• The Dow 30 at a Glance

Questions? Comments? marketinsider@cnbc.com

The storm hitting Wall Street ramped up to category 5, and it's not over.

Wednesday's markets illustrated in every way the fears investors have been living with since the credit crises began a year ago. There's a major lack of confidence in financial institutions and in the stock market itself. Investors are questioning whether the government's massive rescue efforts are the right moves.

So now cash is king. Stocks were shunned. Money ran for the safety of short-term t-bills at an astonishing rate, and suddenly gold, surging 9 percent, is a safe haven from everything, including the dollar.

"The overriding principle is capital preservation ... The pendulum for several years has swung very much to the greed side -- mispricing risk, and now it's swung very hard to the fear side -- capital preservation," said Marc Chandler of Brown Brothers Harriman.

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Thursday's markets promise more pounding volatility. "People sold into the close. They're obviously uncomfortable with what's going on in the markets," said Robert Harrington, head of block trading at UBS. The Dow, which finished down 449 points, more than doubled its losses in the final hour and took a big dive at the close.

"It's a form of capitulation selling, but since we're delevering, how long it can last and how big it will be is a big question," said Harrington. "The VIX is high. There's fear in the street."

"Modern history would tell us that maybe we're getting close to the bottom. The only thing I think is different this time is we're really de-levering and until the leverage is out, I don't know how you build the trust back ... and it's global," he said.

Heading into the afternoon session Thursday, Asian markets bled red across the region , tumbling 3 to 4 percent with Hong Kong down a whopping 6.5 percent near the lunch break.

On Wall Street, financial stocks were down more than 8 percent as a widening in credit default swaps drew attention to Morgan Stanley and Goldman Sachs yet again. Both those stocks were down sharply. By the end of the day, it was clear Morgan was looking for a possible suitor, as was Washington Mutual . CNBC's Charlie Gasparino and David Faber reported Morgan was talking to several suitors including the Chinese government, Citigroup and Wachovia .

Meanwhile, the SEC was moving to implement tighter rules on short sellers, effective Thursday. In a release Wednesday evening, Securities and Exchange Commission Chairman Christopher Cox said he additionally asked the commission to consider requiring hedge funds and other large investors to disclose their short trade positions.

• SEC Statement on Immediate Actions to Combat Market Manipulation

Market Mayhem

The Dow declined 4.1 percent to 10,609, its lowest close since November, 2005. The S&P 500 slumped 4.7 percent to 1156, its lowest close since May, 2005, and the Nasdaq was off 4.9 percent to 2098, its biggest drop in seven years.

Oil rose by more than $6 to $97.78 per barrel.

The 10-year added 22/32 to 104-29/32, which lowered its yield to 3.412. The two year was yielding 1.624 percent. The three month t-bills were wild, with the yield falling to a level of two basis points, meaning the yield was essentially zero and they were being used as a liquid, safe haven.

Harrington said action in the t-bill market resulted from news that a major money market fund "broke the buck." The Reserve reported Tuesday that it was temporarily freezing redemptions and that its fund was returning $0.97 on the dollar due to losses on Lehman bonds. "It certainly is showing a nervousness and you can't really blame people," said Harrington.

The dollar fell 1.46 percent against the euro Wednesday and was at $1.4352 per euro.

"I thought (last week) the advance of the dollar is probably over, and we're in for a period of dollar weakness," said Chandler, Brown Brothers chief currency strategist. He expects it to move to a level of about $1.50 against the euro before this selling bout is over. The idea that the U.S. is in better shape than the rest of the world had propped up the currency in recent weeks, but he says that trend is over for now.

"Now the spotlight is focused back on the U.S. and the deterioration of U.S. conditions ... Negativism about the U.S. is overwhelming the pessimism on Europe and Japan," he said. Chandler does point out that overseas stock markets fared worse than the U.S. in the past month.

Patrick Kernan, a managing partner with Cardinal Capital, watches volatility closely. He trades options on the S&P 500. In an email, he wrote: "The week has been very strange. Monday on the initial drop, volatility did not go nearly as high as I expected it to. However, the last two days have seen a lot of panic trading and that leads me to believe there is still a lot of volatility left in this market."

He also said investors with a strong stomach might start to see some buying opportunities.

Econorama

Economic data Thursday includes weekly jobless claims at 8:30 a.m., the Philadelphia Fed survey and leading indicators, both at 10 a.m. FedEx reports earnings before the bell, as do Carnival and Conagra. Oracle reports after the bell.

Questions? Comments? marketinsider@cnbc.com