The start of the economic week brought drama to the credit and finance markets. News circulated Sunday that large creditor Lehman was on the verge of bankruptcy. Other disconcerting news in the troubled credit sector sent Wall Street investors into a panic. After spending much of the day in a deep hole, the Dow plunged from around 330 points down to a close of 504 points down in the last half-hour of Monday’s trade.

Investors and consumers have had much to be concerned with in recent weeks despite some positive turns of events in credit markets. The government takeover of Fannie Mae and Freddie Mac was construed as a positive event, but demonstrated the emergency perspective the Bush administration has for the current state of the finance sector.

Tuesday (September 16) brought even more drastic news thanks to the government and the Fed. Following its interest rate policy meeting, the Fed announced that it was holding steady on its fund rate. Many analysts had speculated a possible cut to the bank lending rate in light of the sour news in retail and credit markets of late. The Fed decided to be firm with rates but says it is focused on taking whatever measures are necessary to help spark the economy.

In another move that essentially puts the US government in the role of the country’s largest creditor the government presented an $85 billion emergency loan to AIG, in exchange for 80 per cent ownership of the large creditor. This follows the huge Fannie and Freddie bailout and adds to the growing prominence of the government in the credit markets.

According to Bloomberg, the US government has injected $140 billion in temporary reserves into the banking system this week. This represents the largest one-week reserve support since the 9/11 terrorist attacks in 2001.

Britain’s Barclays agreed to purchase the Lehman investment banking Arm Tuesday, for $250 million. This was welcomed news by the financial markets just one day after the Lehman parent company filed for bankruptcy. Barclays is actual set to buy Lehman’s New York headquarters and two data centers worth a reported $1.5 billion.

There was some positive “organic” news in the financial sector on Tuesday as well. Goldman Sachs and Morgan Stanley both boasted nice profits in their earnings reports. Some analysts have been highlighting some beaten-down finance stocks as best buy opportunities in the stock market. They point to the fact that some strong finance and credit companies have paid the price for the general negativity surrounding the sectors.

Typical Americans are mostly consumed with the potential to obtain financing and protect investment in the near-term. Many experts have used the credit and finance company failings as an opportunity remind savers about the importance of a diversified investment portfolio. Despite FDIC protection for many banks, many Americans are concerned with how secure their investments and savings are in the event their bank crumbles as others have been. The government’s aggressive response to support the credit and banking system is refreshing for Americans to see. However, the concern is just how much taxpayer backed bail outs and emergency loans the government must rely on to ease the credit burden.

Market Recap

The Dow was smashed on Monday, with a late plunge pushing the index to a 504 point drop. The NASDAQ and S&P had strong slides as well. The catalyst for the movie was news late Sunday that Lehman was to declare bankruptcy and another major creditor was seeking an emergency buyout from Bank of America. The dollar was hammered in synch, especially against the yen. A rebound day came together on Tuesday as the Dow took back 141 points. The NASDAQ and S&P also regained 27 and 20 points. The government announced an emergency loan for AIG and Barclays agreed to a buyout of Lehman.

Neil Kokemuller
Tuesday, September 16, 2008
11:43 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.