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Air of Pessimism Likely to Persist Despite Approval of Revised $700 Billion Bailout

6 October 2008 - News - Editor

Following almost two weeks of intense debate, the revised $700 billion financial sector bailout plan was passed by the U.S. House of Representatives, with President George W. Bush signing the bill into law on Friday. With unanswered questions regarding the implementation of the plan and many questioning its potential effectiveness, analysts are doubtful that the plan’s approval will lift the cloud of pessimism hanging over the stock markets, at least in the short term.

Financial analysts generally agree that the best investors can hope for at this point is for the frozen credit markets to slowly thaw out – just how slowly, remains to be seen. Not all financial sector news has been bad however, as Wells Fargo & Co, being one of the strongest remaining U.S. banks, agreed to buy Wachovia complete with its large portfolio of troubled mortgages, without government assistance. The board of Wachovia has accepted the offer made by Wells Fargo and has immediately taken steps to assure their thousands of customers that the buyout will be to their benefit. In addition to the $5 billion investment Warren Buffet made in Goldman Sachs recently, he put $3 billion into General Electric last week, boosting hopes that financial sector stocks may be bottoming out.

Nonetheless, the Dow, Nasdaq and S&P 500 remain down by some twenty percent on the year and, in general, the economic picture continues to look daunting. Last week ended with the Dow down 7.3 percent, Nasdaq down 10.8 percent and the S&P down 9.4 percent. In addition to concerns over the effective implementation of the bailout plan, investors are awaiting with trepidation corporate third quarter results, which are expected to begin trickling in during this week. Also indicating a widespread lack of confidence in the financial sector, the cost for banks to borrow dollars increased for the fifth day in a row on Friday. In view of the ongoing turmoil in the markets, the majority of investors may very well choose to sit tight until they see what effect the bailout plan has on the financial sector.

Adding to the general air of pessimism and anxiety is the fact that there have been significant job losses every month of 2008, with around 159,000 Americans losing their jobs in September, the worst one-month tally in five and a half years. Moreover, the housing market remains in crisis mode and manufacturing output has taken a plunge.

House Speaker, Nancy Pelosi, revealed that congressional hearings will be held to pinpoint the causes of the current crisis and the nation’s financial system will be subject to more intensive “scrutiny and accountability” in an effort to prevent this situation from arising again in the future. No doubt the week ahead will prove to be an interesting one, as U.S. officials tackle the task of restoring confidence in the financial system.

 


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