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.
"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.
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.
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."
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.
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