Rejected $700 Billion Financial Bailout Plan Marked The End of an Unprecedented Month on Wall Street

On Monday, September 29, 2008, the House of Representatives voted 228-205 to reject the $700 billion financial bailout plan and announced that the House would not vote again on that day. On news of the plan’s failure in the House, stocks plummeted as much as 770 points, the largest one-day dollar value drop ever. The historic vote rejecting the bailout plan endorsed by President George W. Bush and congressional leaders of both parties was the culmination of a month that will not be soon forgotten.

The financial meltdown that unraveled on Wall Street during September 2008 represents an unprecedented financial crisis in the eyes of many experts. The ominous news coming out of Wall Street this month was unrelenting and appeared to worsen as the days passed by, forcing Washington to intervene in extraordinary fashion. During this month alone, the US government bailed out individual companies, seized control of banks and proposed a highly controversial $700 billion taxpayer-funded plan that would have allowed the government to buy bad mortgages (which most experts believe are the impetus of this current financial crisis) and other bad debt held by banks and financial institutions in the hopes of reassuring investors and strengthening the country’s credit markets. Proponents of the $700 billion bailout bill claimed it was necessary to assist these illiquid financial institutions to avoid complete economic disaster.

September began with the collapse of mortgage giants Fannie Mae and Freddie Mac. In response to this news, on September 6, the US government seized the two companies that together fund approximately three-quarters of the
new home mortgages. Specifically, the US Treasury pledged to provide as much as $200 billion to help the two companies deal with heavy losses on their mortgage defaults.

Less than a week later, Lehman Brothers Holdings Inc. abruptly collapsed. Despite having assisted other financial institutions in the recent past, including Bear Stearns Cos. earlier this year, the US government decided not to help and allowed Lehman Brothers to fail. Consequently, Lehman filed bankruptcy the morning of Monday, September 15. The news of Lehman’s bankruptcy filing sparked a series of events that sent credit markets and the stock market into disarray.

On the same day as Lehman’s announcement, Bank of America quickly agreed to purchase Merrill Lynch & Co. for $29 a share, or $50 billion. The next day, on September 16, the US government agreed to lend up to $85 billion to the giant insurer American International Group Inc. (“AIG”) to prevent the company’s collapse. Then on September 21, in an attempt to avoid the same fate as their competitors Lehman and Merrill Lynch, investment banks Morgan Stanley and Goldman Sachs Group Inc. were converted into traditional bank holding companies by the Federal Reserve. This represented an extraordinary measure for two of Wall Street’s premiere institutions. Facing declining revenues and tens of billions of dollars in writedowns and losses on mortgage-related securities and other types of loans, Morgan Stanley and Goldman Sachs claim to have had little choice. Both companies continued to seek investors with Goldman receiving a $5 billion investment from Warren Buffet’s Berkshire Hathaway Inc.

On September 26, in what became the largest bank failure in US history, the US government seized and sold Washington Mutual Inc. (“WaMu”) to J.P. Morgan, which agreed to pay $1.9 billion to the government for WaMu's banking business.  With a record-setting $307 billion in assets, WaMu’s collapse, which was triggered by $16.7 billion of deposit withdrawals, marked what was then considered the low point of the US financial crisis. In March 2008, J.P. Morgan had also agreed to purchase Bear Stearns.

Finally, on September 29, the same day the House rejected the bailout plan, Citigroup Inc. acquired Wachovia Corp.’s banking operations for $2.1 billion in stock and the company will absorb another $53 billion of losses on a $312 billion pool of loans. Citigroup’s acquisition further consolidates the banking industry and ends a month where things on Wall Street changed — quickly.

The rapid pace of change on Wall Street emphasizes the severity of the current US financial crisis. Just this year, 13 banks have failed, leaving depositors nervous. The credit market appears to have come close to a grinding halt, the stock market has taken an unparalleled nosedive and seems to be in free fall now that the $700 billion bailout plan that was supposed to fix this financial crisis has been rejected by the House. Ultimately, the events of September 2008 have left the US financial industry in shambles and many questions concerning the future of the
US economy unanswered. 

newsletter_oct2008.jpg Source : Scott+Scott October 2008 Newsletter