Dow Drops 500 Points In Turbulent Trading

Skittish Investors Fearful About Ailing Financial Firms

(CBS/AP)  Wall Street has had yet another dismal day Tuesday, extending its heavy losses as investors' worries about the financial sector wiped out early enthusiasm over the Federal Reserve's efforts to inject confidence into the credit markets. Trading remained fractious and grew more turbulent in the last hour, with the Dow Jones industrial average losing more than 500 points and all the major indexes falling more than 5 percent.

This latest plunge, which followed a big drop on Monday, came after Bank of America Corp. reported its third-quarter profits fell 68 percent.

The Dow was down 508 points at the closing bell, or 5.11 percent, at the 9,447 level, after falling nearly 370 Monday. The broader Standard & Poor's 500 index is down 5.73 percent and the Nasdaq composite index is down 5.80 percent.

Credit markets showed some signs of easing as demand for safe-haven investments decreased. Credit markets seized up last month after Lehman Brothers Holdings Inc. declared bankruptcy and the government stepped in to rescue insurer American International Group Inc.

The forecast for the nation's economy keeps getting gloomier. And the weatherman bearing the bad news Tuesday was Federal Reserve Chairman Ben Bernanke.

"The outlook for economic growth has worsened and the downside risks to growth have increased," Bernanke said in an address this afternoon.

So the Fed will try to use a blowtorch to thaw the frozen credit markets by making short term loans directly to big businesses, reports CBS News business correspondent Anthony Mason.

The move is "Extremely unusual," says Wall Street historian Charles Geisst. "It's never been done before. And it's also getting close to a desperate move."

The "commercial paper market," as it's called, is critical to large companies that need quick cash to buy supplies or meet payroll. The businesses offer what essentially are short-term IOUs that pay interest. They're usually financed by money market funds or major investors.

Credit card companies, for example, use them to pay merchants, while waiting for your monthly payment. But as the credit system has seized up, even blue chip companies like Caterpillar and General Electric have been forced to pay much higher interest rates for short-term loans they need. That's why the Fed has made this historic move.

If it doesn't work, Geisst said, "Consumer credit is gonna dry up very quickly."

Already in August, consumer borrowing fell for the first time in more than a decade. News of the Fed's latest move initially rallied the markets. But that optimism soon evaporated.

"We are kind of in a post traumatic stress order phase - one loud noise and we are all jumping a little bit," says Bernard McSherry of Cuttone & Company.

Even Bernanke's hint of another rate cut couldn't lift Wall Street's spirits. As one trader put it: "We want the Fed to fire the gun. We're just afraid they're gonna run out of bullets."

Despite Bernanke's attempt to console the stock market, investors remain worried about financial companies like Bank of America Corp., which after the closing bell Monday slashed its dividend and reported that its third-quarter profit fell 68 percent. The stock fell $4.68, or 15 percent, to $27.54 and was the steepest decliner among the 30 stocks that comprise the Dow Jones industrial average.

Investors are fearful that financial companies will continue to face cash shortages even with efforts in Washington and by other governments to resuscitate lending.

Investors are still hoping to see other moves from the Fed to boost confidence. Australia's central bank lowered interest rates by the largest amount since 1992 in a surprise move, and that reignited hopes that others, including the Fed and European Central Bank, might follow suit.

Though not giving the market a rate cut, the Fed has taken other steps to help unclog the credit markets. On Tuesday, policymakers provided more details about when it will make $900 billion in short-term loans available to squeezed banks.

The loans are made available to banks through auctions. The Fed, in coordination with other countries' central banks engaged in similar efforts, laid out dates that it will conduct the auctions through the rest of this year.

Concerns about the credit markets still fed demand for the relative safety of government debt, though pressures eased. Demand for short-term Treasurys remains high because of their safety; investors are willing to take extremely low returns just to have their money in a secure place.

Some investors moved into longer-term Treasury bonds, which while still safe don't draw as much demand as shorter-term debt in times of fear. The yield on the 10-year note fell to 3.52 percent from 3.50 percent late Monday.

Oil prices rebounded after plunging Monday to an eight-month low on concerns a global recession will undermine demand for crude. Light, sweet crude rose $2.36 to $90.17 a barrel on the New York Mercantile Exchange.

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Editor's Note: This story was updated on Oct. 8, 2008, to report that Caterpillar and General Electric are facing higher interest rates for short-term loans. High credit-rated CAT and GE are getting loans (selling bonds) -- just at higher premiums than they would like and many analysts expect.
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[samthetvcat]

That plan McCain mentioned about buying up the bad mortgages at the ground level I guess is intended to split up the money of Paulson''s bailout so that almost half the proceeds go to the root of the cause rather than the investment bankers in the hopes that it''ll trickle down to that level.

I wonder whether talking about such an idea which hastens the onset of the bottoming of the housing market thereby making banks more normal might bring hope to the markets. Because it pushes the ball forward - if so Barack could jump on board so it doesn''t have to be a political thing.

Also I wonder whether it damages market confidence for the candidates to be talking about the economy being so bad as they try to ''empathize'' with people . . . who was it that actually used the term ''armageddon'' in trying to pass the bailout bill? You have to figure that probably resulted in at least a half a trillion in market sell-offs - it was alarming!

[harp1963]

The super wealthy can soak us all into poverty if they want to. Exxon can make 50 billion this year, who cares. If they want to take all we have, go ahead, because the consumer they are destroying is the one who won''t be buying anything very shortly. Close the malls, close the restaurants, close the car dealerships, close all the factories that might still be in America. Make everything with slave labor in third world countries, that we still can''t afford. WHEN YOU DUMB B A S T A R D S IN THE TOP 1% FINALLY REALIZE YOU NEED A VIABLE PROSPEROUS MIDDLE CLASS TO MAKE THE WORLD GO ROUND, YOU MIGHT, MIGHT UNDERSTAND SHARING IS NECCESSARY AND SLAVE LABOR IS BAD. Go read the book, "All I Need to Know I Learned in Kindergarten."

[claydowner]

America is paying the price for budget deficits of over $400 billion and our national debt ceiling being raised to $11.4 trillion. We also have a pesky trade deficit of around $1 trillion with about $700 billion going to OPEC dictators and another $300 billion going to China. We are borrowing money from China to pay for oil from the Middle East to help pollute our environment with oil. There also is the pesky problem of a $3 trillion war in Iraq and god knows how much more for Afghanistan. The Bush-Cheney regime have caused terrible economic and financial damage to our economy and our country.

Then of course we get the bailout on Wall Street worth $700 billion. Now the Fed wants to buy commercial paper. Granted most of these loans will be repaid in one form or another. This is not the point, the Fed is the lender of last resort. We could have prevented most of our problems by not invading and occupying Iraq, if we had regulated Wall Street investment banks like we regulated commercial banks on Main Street. Maybe we will finally relearn these important lessons that unregulated Wall Street markets will destroy our entire economy. Regulated capitalism is the only way to avoid socialism although some would argue we are being pretty socialist right now.

[mcv57]

Seen the Presidential Debate. What a forest, I think they both lost.

I did like when McInsane said the "corruption" word, but only reserved the label for the Corporate leaders. I still believe this economy will not heal until America starts with Government Corruption first; then arrest Corporate Corruption. Otherwise, its like a crooked cop arresting a crooked judge - no more kickbacks for the corrupt system.

On the other hand, Barrackman stomped on Insane with the Iraq conflict. The war is dragging our economy and weakening national security. All that Insane had to offer was a police war for days to come with no end in financing the insanity.

Lou Dobbs for President!

[gwjackie]

Check with six-pack i think she may have one or two polar bear. two moose and the first dude has a dog.

[edward1975-2009]

gwjackie: This is the result of both parties. Both our political parties no longer serve the people. This bailout was a joke and everybody in Washington knew it. They knew this would fix not a thing and did it anyway. Look at the approval ratings for Bush and Congress, 25% for Bush, a whopping 15% for Congress. They have both failed the people and driven us into a hole that will take yrs. to come out of.

[gwjackie]

Whe the people in this country have had enough of this look out. and there is going to be a civil war in this country it is not if but when. The Republicans have been feeding the American people a spoon full of horseshi! at a time for the last 8yrs. Now with John McCain the Republicans want to to try to put some sugar on it and feed you the whole load at one time.

[whitemale08]

Remember me, I''m the one that said everybody will start loosing everything come October 1st.

And just yesterday I warned everybody to NOT "ride this storm out" by keeping your money in 401ks and the stock market.

There is no bottom to this because our economy has to get off this debt phylosophy of ''fiat currency'' and debt swap derivatives and ''floating exchange rates''.

That means we have to start over from scratch.

In the meantime enjoy the implosion of the old Wall Street and City of London Financial Empire.

[txgrouch2006]

through a apllication process, americans in need of mortgage help would apply, gov. would send check to the mortgage company,
Posted by risingguns at 08:42 PM : Oct 07, 2008

That''s the most irrational, absurd idea imaginable.

I think it''s time for your therapist to adjust your meds.

[txgrouch2006]

It''''s funny how all the Republican Presidents say, Ohh, the economy is strong, ooh it will get better...
Posted by Poradicus at 08:55 PM : Oct 07, 2008

It''s about as funny as when a Democrat President says "Prosperity is just around the corner (when the war starts)," "I was NOT drinking at the time of the accident," "I didn''t inhale," or "I did NOT have ... relations with that woman."

Just hilarious. No, wait. That''s not funny at all.