They did this because LIBOR rates were high. Banks had driven up rates because they were afraid to lend to each other. The Dow fell 449.36 points.
On Thursday, September 18, markets rebounded 400 points. Investors learned about a new bank bailout package.
On Friday, September 19, the Dow ended the week at 11,388.44. It was only slightly below its Monday open of 11,416.37. The Fed established the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. It loaned $122.8 billion to banks to buy commercial paper from money market funds. The Fed’s announcement confirmed that credit markets were partially frozen.
On Saturday, September 20, Hank Paulson and Ben Bernanke sent the bank bailout bill to Congress. The Dow bounced around 11,000 until September 29, when the Senate voted against the bailout bill. The Dow fell 777.68 points, the most in any single day in history. Global markets panicked, as well:
- The MSCI World Index dropped 6 percent in one day, the most since its creation in 1970.
- Brazil’s Ibovespa was halted after dropping 10 percent.
- The London FTSE dropped 15 percent.
- Gold soared to over $900 an ounce.
- Oil dropped to $95 a barrel.
To restore financial stability, the Fed doubled its currency swaps with foreign central banks in Europe, England, and Japan to $620 billion. The governments of the world were forced to provide all the liquidity for frozen credit markets. (Source: “Stocks Crushed,” CNNMoney, September 29, 2008. “Fed Pumps $630 Billion into Financial System,” Bloomberg, September 29, 2008. “Stocks Plunge After Congress Rejects Bailout,” September 29, 2008. “Bank Bailouts Sweep Europe,” CNNMoney, September 29, 2008)
October 2008
Congress finally passed the bailout bill in early October, but by now panic had set in. The Labor Department reported that the economy had lost a whopping 159,000 jobs in the prior month. On Monday, October 6, the Dow dropped 800 points, closing below 10,000 for the first time since 2004.
The Federal Reserve fought the ongoing banking liquidity crisis by lending $540 billion to money market funds. That gave them enough cash to meet a continuing barrage of redemptions. Since August, more than $500 billion had been withdrawn from money markets.
JPMorgan Chase managed the Fed’s Money Market Investor Funding Facility. It purchased up to $600 billion of certificates of deposit, bank notes and commercial paper that would come due in 90 days. The remaining $60 billion came from the money markets themselves. But they were also purchasing commercial paper from the MMIFF. (Sources: “Press Release,” Federal Reserve, October 21, 2008. “Fed to Provide $540 Billion to Aid Money Funds,” Bloomberg, October 21, 2008.)
The Fed quickly lowered the fed funds rate to just one percent. But the LIBOR bank lending rate rose to its high of 3.46 percent. It also coordinated a global central bank bailout.
The Dow responded by plummeting 13 percent throughout the month. By the end of October, the BEA released more sobering news. The economy had contracted 0.3 percent in the third quarter. The nation was in recession. (Source: “The Week That Broke Wall Street,” CNNMoney, October 6, 2008.)
November 2008
The month began with more bad news. The Labor Department reported that the economy had lost a staggering 240,000 jobs in October. The AIG bailout grew to $150 billion. Treasury announced it was using part of the $700 billion bailout to buy preferred stocks in the nations’ banks. The Big Three automakers asked for a federal bailout. By November 20, 2008, the Dow had plummeted to 7,552.29, a new low. But the stock market crash of 2008 was not over yet.
December 2008
The Federal Reserve dropped the fed funds rate to zero, its lowest level in history. The Dow ended the year at a sickening 8,776.39, down almost 34 percent for the year.
2009
In a burst of optimism, the Dow climbed to 9,034.69 on January 2, 2009. Investors believed the new Obama administration could tackle the recession with his team of economic advisers. But the bad economic news continued. The Dow plummeted to 6,594.44 on March 5, 2009. This was the true market bottom.
Soon afterward, Obama’s economic stimulus plan instilled the confidence needed to stop the panic. On July 24, 2009, the Dow reached a higher high. It closed at 9,093.24, beating its January high. For most, the stock market crash of 2008 was over.
But scars remained. Investors remained skittish throughout the next four years. On June 1, 2012, they panicked over a poor May jobs report and the eurozone debt crisis. The Dow dropped 275 points, and the 10-year benchmark Treasury yield dropped to 1.443 during intraday trading. This was the lowest rate in more than 200 years. It signaled that the confidence that evaporated during 2008 had not quite returned to Wall Street.