Stock market takes 500 point plunge
Since October investors have lost 22 cents for every dollar invested
Joshua Boak
Issue date: 9/18/08 Section: Nation & World News
NAPLES, Fla. (MCT) - As chairman of the Federal Reserve almost three decades ago, Paul Volcker grappled with inflation that threatened to suffocate the American economy. He now sees a much greater crisis.
"We have a failed financial structure," Volcker said Monday, after a day of tumultuous events that included a 500-point plunge in the Dow Jones industrials. "It's been held together in recent months only by really, truly, extraordinary official actions, actions without any real precedent that go right to the edge of their legal responsibilities. Those actions are necessary."
Of the five independent investment banks that presided over American capitalism, three have been swept aside by the bad bets in the mortgage industry that spawned the housing crisis and credit crunch.
Lehman Brothers declared bankruptcy Monday, while Merrill Lynch agreed suddenly to sell itself to Bank of America; their fates were foreshadowed months earlier by the demise of Bear Stearns.
Shaken up by the news about Lehman and Merrill, and concerned that an enormous insurer, American International Group Inc., was struggling to raise capital, investors fled. The Dow Jones Industrial Average crashed 4.42 percent Monday to close at 10,918. For every dollar invested in the stock market since October, investors have lost 22 cents.
"What we've been seeing really is a wrenching reversal of the exuberance that only a few years ago sent stock markets and then residential values through the roof," Volcker said at a financial conference sponsored by the CME Group in Florida, "and now we have a kind of reversion, very sharply. It's not uncharacteristic of financial markets, moving from exuberance to fear, from greed to fear."
Wall Street bundled home mortgages into bonds, a strategy designed to spread risk that ultimately concentrated it. The bonds had a degree of complexity that could not account for the defaults on sub-prime mortgages, freezing markets that were once liquid and forcing investment banks to write down their holdings by hundreds of billions of dollars.
"We have a failed financial structure," Volcker said Monday, after a day of tumultuous events that included a 500-point plunge in the Dow Jones industrials. "It's been held together in recent months only by really, truly, extraordinary official actions, actions without any real precedent that go right to the edge of their legal responsibilities. Those actions are necessary."
Of the five independent investment banks that presided over American capitalism, three have been swept aside by the bad bets in the mortgage industry that spawned the housing crisis and credit crunch.
Lehman Brothers declared bankruptcy Monday, while Merrill Lynch agreed suddenly to sell itself to Bank of America; their fates were foreshadowed months earlier by the demise of Bear Stearns.
Shaken up by the news about Lehman and Merrill, and concerned that an enormous insurer, American International Group Inc., was struggling to raise capital, investors fled. The Dow Jones Industrial Average crashed 4.42 percent Monday to close at 10,918. For every dollar invested in the stock market since October, investors have lost 22 cents.
"What we've been seeing really is a wrenching reversal of the exuberance that only a few years ago sent stock markets and then residential values through the roof," Volcker said at a financial conference sponsored by the CME Group in Florida, "and now we have a kind of reversion, very sharply. It's not uncharacteristic of financial markets, moving from exuberance to fear, from greed to fear."
Wall Street bundled home mortgages into bonds, a strategy designed to spread risk that ultimately concentrated it. The bonds had a degree of complexity that could not account for the defaults on sub-prime mortgages, freezing markets that were once liquid and forcing investment banks to write down their holdings by hundreds of billions of dollars.
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