Stocks traded in a rocky fashion on Friday after the U.S. House of Representatives passed the government’s massive financial rescue bill after rejecting an earlier version on Monday.
After posting strong gains ahead of the vote, stocks sold off sharply after the bill was passed, ending the day down about 1.5% after trading 3% higher before the vote.
Credit markets fared no better, as measures of banks’ willingness to lend actually worsened after the vote.
Behind the market’s reaction is the realization that it will take time to see if the plan crafted by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke will work. Since Lehman Brothers and AIG failed in mid-September, credit markets have seized up and capital has been hard to come by, hurting banks and other businesses that depend on commercial paper markets to fund operations.
Evidence of the sudden massive slowdown from the credit crisis showed up in the government’s monthly jobs report today, which showed a worse than expected loss of 159,000 jobs last month, the biggest monthly decline in five years and the ninth straight month of job losses.
The core of the plan seeks to remove distressed debt from the balance sheets of financial companies by using a reverse auction process to see what price companies are willing to sell the assets at. When the market eventually improves, the government hopes to recoup much of the cost of the program by selling the assets.
But it will take time to set up the program and even longer to see if it works. The stakes are very high; if it works, the economic benefits will be immense, and the plan could become a model for other countries dealing with systemic crises. If it doesn’t, there are other options that came up over the two-week bailout debate that could be tried next, but at that point the economy will likely be well into recession.
And after that, officials will long be dealing with the causes of the crisis. The major investment banks will no longer be as heavily leveraged, with the bankruptcy of Lehman, the acquisitions of Bear Stearns and Merrill Lynch, and the conversion to commercial banks of Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS). But much of the rest of the system remains clogged with leverage, including the massive unregulated derivatives trade and hedge funds.
The SEC has admitted in recent weeks that voluntary regulation doesn’t work, so stronger regulation of financial markets appears likely. Still, the SEC has yet to reinstate Depression-era shorting restrictions that were removed last year or to make good on promises of permanent restrictions on naked short-selling despite taking the view that abusive short-selling contributed to the demise of some financial firms.
And credit ratings agencies like S&P and Moody’s will likely face calls for reform after initially giving their blessing to the complex debt instruments at the heart of the crisis.
The stakes are also high for technology companies, whose shares have been battered in recent weeks on fears that the strong IT spending market would weaken amid a broader slowdown and credit crunch.
Microsoft (NASDAQ: MSFT), for one, welcomed the bill’s passage, saying in a statement that the plan “is a critically important step to bringing back economic stability in the U.S. and around the globe. This crisis affects more than just the U.S. financial sector, it affects every corner of the world economy, and today’s vote will help re-instill confidence around the globe.”
Microsoft shares ended the day fractionally higher.
Apple (NASDAQ: AAPL) had a volatile day on a false rumor about CEO Steve Jobs’ health, ending the day 3% lower.
Symantec (NASDAQ: SYMC), SAP (NYSE: SAP) and Xyratex (NASDAQ: XRTX) fell on downgrades.
Sprint (NYSE: S) lost 5.5% despite reports of interest in its Nextel unit.
AMD (NYSE: AMD) rose more than 9% on no apparent news.
The Nasdaq lost 29 to 1947, the S&P fell 15 to 1099, and the Dow lost 157 to 10,325. Volume rose to 6.73 billion shares on the NYSE, and 2.54 billion on the Nasdaq. Decliners led 22-12 on the NYSE, and 20-8 on the Nasdaq. Downside volume was 89% on the NYSE, and 74% on the Nasdaq. New highs-new lows were 17-655 on the NYSE, and 5-478 on the Nasdaq.