Giddy Up

Remember on Seinfeld when Kramer was so excited that he exclaimed, “Giddy Up”? Well markets decided to saddle up yesterday and see what it’s like to trade higher—certainly a novel idea as “the most significant financial crisis since the Great Depression” continues to unfold (Note to the networks—love the new graphics!)

After being down 150 points at 1:00 pm or so, stocks meandered to the unchanged line. Then at approximately 3:00 pm, something happened…all of the sudden, buyers piled into equities, as reports emerged that the federal government was about to take steps to create the mother of all bailouts. While there were few details available, the simple notion that the government was going to do something BIG, allowed investors to breathe a sigh of relief. The surge was lead by financial companies as the Dow Jones Industrial Average swung in a 567-point range from the low of the day to the close, ending 410.03 points higher, up 3.9%, at 11019.69. The S&P 500 Index climbed 4.3%, its biggest daily percentage gain in nearly six years, to end at 1206.33 and the Nasdaq Composite Index leapt 4.8%, its biggest daily move in more than five years, to end at 2199.10 as big technology companies posted solid gains. Gold had closed before the bailout news hit, so it is likely that yesterday’s nearly $50 move up will be erased today.

Markets had been trading higher earlier in the day on Thursday after the Fed authorized a $180 billion expansion of its swap lines with other world central banks. But soon that was not enough, so Henry Paulson and Ben Bernanke, (the President and Vice President of our economy), determined that something bigger was necessary. The plan is to create some sort of government agency that would purchase distressed mortgages at deep discounts from banks and other financial institutions. This is something along the lines of the Resolution Trust Corp. (RTC), which was a key tool to liquidating holdings of failed savings and loans in the late 1980s and early 1990s. Created in 1989, the RTC disposed of bad assets held by hundreds of crippled savings and loans that had been burned in the eighties real estate boom. The RTC closed or reorganized 747 institutions holding assets of nearly $400 billion. By 1995, the S&L crisis had passed and the RTC was folded into the FDIC. The difference is that the 2008 version of the RTC would have the government taking over the distressed assets, not the entire institutions.

Beyond the RTC-like plan, before the opening bell today, the government unveiled a plan to shore up money-market funds, which experienced massive redemptions as one fund “broke the buck” and fear intensified earlier this week. There is likely to be some sort of federal insurance for investors in money market funds (which total $3.4 trillion), akin to the coverage offered by the FDIC for bank accounts. Finally, the SEC (remember them?) is reinstating the temporary ban on short-selling of hundreds of financial stocks. The move comes a day after the UK’s Financial Services Authority (FSA) announced that it was banning short selling on financial stocks until the end of the year. Put all of this together and it looks like another up day for stocks…giddy up!