The Dow Jones Industrial Average (DJIA) plunged on Tuesday to close down over 500 points. The US stock index lost ground following remarks by the Federal Reserve Chairman Ben Bernanke saying the American economic outlook has worsened.
The DJIA slid -508.39 points to close at 9447.11 giving up over five percent (-5.11%) of its value. The NASDAQ composite index lost over 100 points (-108.08) retreating to 1754.88. The Standard and Poor's (S&P) 500 index of large cap stocks dived more than 60 points (-60.66) to close at 996.23. The 10 Year Bond rose +0.05 ending at 3.5.
Speaking before a meeting of the National Association for Business Economics, Bernanke said, "Over all, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased.”
The Fed Chairman left open the possibility the Fed's Board of Governors may lower key interest rates at its next meeting on October 28 and 29.
Bernanke, a former Princeton University economics professor and scholar of the Great Depression, stated the Federal Reserve would continue to pursue an aggressive policy using all available tools at its disposal to "address a problem of historic dimensions."
The Federal Reserve also said today it would enter the commercial paper trade to provide short term loans to businesses and corporations in an effort to stabilize money markets and jumpstart corporate liquidity.
The biggest losers on Tuesday were financials: Bank of America, Merrill Lynch, and Morgan Stanley all lost about 25% each of their value in trading.
Morgan Stanley stock took a beating after rumors circulated that potential buyer Mitsubishi UFJ Financial Group of Japan was backing out of a deal to purchase the investment firm. Morgan Stanley executives denied the rumor.
Bank of America which took over Merrill Lynch's brokerage business was perceived to be one of the few relatively healthy American financial institutions, but yesterday cut its dividend while reporting a downgrade of third-quarter earnings. The bank also announced a restructuring of over 300,000 subprime and Alt A mortgages acquired in the purchase of Countrywide Financial Corporation in July.
In other news indicating frozen credit markets remain at a standstill, the Commonwealth of Massachusetts announced the second delay of a planned sale of municipal bonds to fund government operations as potential buyers demanded higher yields. If Massachusetts fails to raise needed revenue in the relatively near future, it may be forced to join the State of California which last week requested a $7 billion emergency loan from the federal government to pay for routine state and local services. Other states, such as New York, may be vulnerable to credit pressures and lack of liquidity as well.
In the State of New Jersey, Governor Jon Corzine on Tuesday announced that he will address a joint session of the state legislature to request an emergency economic stimulus plan on Thursday, October 16, 2008.
Overseas, Geir Haarde, Iceland's Prime Minister, received broad-based national emergency powers from parliament to manage the island state's banking system in order to avoid government bankruptcy. The Icelandic government confirmed negotiations with Moscow for a huge loan to support Iceland's financial infrastructure. The Icelandic Financial Supervisory Authority (IFSA) nationalized a second prime Icelandic bank Landsbanki (Icesave) in as many weeks. Following last week's take over of Glitnir by the IFSA the krona (currency) shattered against the dollar losing over 20 percent of its value. Iceland's stock exchange remained closed for a second day Tuesday.
In the United Kingdom, the British Chambers of Commerce (BCC) announced the country was in recession and predicted that job losses could rise to over 350 thousand. British Prime Minister Gordon Brown is discussing a national bailout of the kingdom's financial system with the Bank of England. Her Majesty's government has increased its savings guarantee today by 15 thousand pounds to a total of 50 thousand pounds. British banking giants Barclays (-9%), HBOS (-43%), Lloyds TSB (-13%), and the Royal Bank of Scotland (-39%) all ended trading sharply down on Tuesday.
The government of Belgium raised the level of guaranteed bank deposits 80% to 100,000 euros. The largest Belgian bank Fortis has destabilized since it purchased part of the Dutch bank ABN Amro in October of 2007. BNP Paribas of France agreed to buy 75% of Fortis operations in Belgium and Luxembourg which will both retain a minority share. Fortis banking operations in the Netherlands were nationalized.
Denmark, Germany, Greece, the Netherlands, and Spain all either raised their national savings deposit guarantees or pledged to guarantee banking deposits over the course of the past week.
Spanish Prime Minister Jose Luis Rodriguez Zapatero today reinforced French/EU President Nicolas Sarkozy's call for a common European Union plan to combat the continuing global financial meltdown.
Evidence is surfacing that the financial crisis is continuing its destructive spread through world credit markets: Japan's stock prices dropped to levels not seen in over four years, and both Egyptian (-19%) and Saudia Arabian (-8%) stock indices lost value on Tuesday.