Daily Financial Crisis Recap 23.10.08

Greenspan faces tough questions, photo by Doug Mills for NYT

Stocks are up today, but continue to remain volatile. The Dow finished at 8,691.25, a gain of 172.04 or 2.02% today.

Greenspan concedes error on derivatives regulation. A staunch promoter of deregulation during his 18-year reign at the Fed, Greenspan faced tough questions in a hearing today.

US Senators press for action to stem mortage foreclosures.

The real estate bubble in China has burst. In a Shenzhen complex, 50 out of 780 apartments are occupied.

Credit Suisse lost $1.1 billion this quarter. Like most banks, they lost this quarter.

Investors continue to flee hedgefunds. In the last three months, hedgefunds have lost $180 billion. Hedgefunds are supposed to make money in bear and bull markets. The average fund lost 17.6%. Many wealthy individuals are flabbergasted by their losses. Many managers are quitting their funds.

AIG to suspend millions in executive pay.

The next article in The Reckoning is up over at the NYTimes. Treasury Secreatry Henry M. Paulson Jr. tells the story. One of the biggest problems was the bankruptcy of Lehman Brothers, one of the largest institutions issuing commercial papers. The credit market was crushed.

Commercial paper is sometimes described as the lubricant that keeps modern economies moving, and the amount of commercial paper issued has increased rapidly in recent years.

But as the credit crisis took hold in 2007 and deepened in 2008, the commercial paper market began to dry up. In October 2008, the market for that kind of debt all but shut down, with many major corporations unable to borrow for longer than a day at a time, as banks become more fearful of giving out cash. The volume of such debt totaled about $1.6 trillion as of Oct. 1, down 11 percent from three weeks earlier.

In response, the Federal Reserve on Oct. 7 announced a radical plan to buy large amounts of the notes directly in the hope of restoring liquidity to the commercial paper market and thereby to the credit markets at large. The purchases, to be conducted through a newly created Commercial Paper Funding Facility, would put large amounts of taxpayer money at risk, but reflect the Fed’s dire assessment of the threat to the economy.

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