Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly With Liz Peek (Week of 9/15)

Editor’s Note: Liz Peek is a financial columnist.

Update 11:30 AM: Treasury Secretary Henry Paulson and President Bush have now spoken to the nation about the soon-to-be proposed mortgage rescue plan. Both spoke in broad terms, but the program may include the buying of mortgage-backed assets by Fannie Mae and Freddie Mac. Paulson, when pressed, said that the plan could cost taxpayers hundreds of millions of dollars, but that the cost of inaction could be far higher. 

The government is hoping to put a proposal before Congress very quickly, and is counting on bipartisan support to move the measure through. My guess is that they’ll get it. No one wants to be the guy that voted against saving the economy.

At the end of the day, much of the turmoil in recent months has been because of uncertainty about the mortgage-related assets weighing down the balance sheets of the financial institutions. The extent of the holdings has been unknown, and we have witnessed a death of a thousand cuts as one bank after another has written down assets. Maybe this program will allow financial institutions to get damaged goods off their books in one broad move. That would go a long way to reassuring investors.

Stay tuned.

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We are coming to the end of an historic week on Wall Street. Never before has the stock market been as volatile; the swings in total share valuations have been as much as one trillion dollars in a single day. Surely, the underlying value of American businesses does not rise and fall in such measure.

Yesterday’s surge in stock prices looks likely to continue today because of moves taken by the Federal Reserve and the Treasury to guarantee money market funds, to ban short selling on 799 financial stocks and to institute a larger, overarching rescue plan for banks.

The problems in money market funds – considered cash equivalents by most investors – stemmed from the funds’ desire to boost returns by mixing in slightly gamey commercial paper or other short-term obligations that carried higher yields. Such securities in normal times would have been fine, and would not have threatened the integrity of a fund.

These are not normal times. The Reserve Primary Fund announced Tuesday that its holdings of Lehman Brothers paper would be written down to zero, and that the fund’s investors stood to lose a considerable portion of their investment. This is known as "breaking the buck," since money market funds’ net asset values always equal $1.00. It has happened only once to my knowledge – in 1994. Normally if a fund has a loss in a particular instrument, the parent organization steps in to make up the difference. Money market funds, unlike savings accounts, have not historically been guaranteed by the government. The threat of wholesale withdrawals from money market funds caused pandemonium in the markets yesterday, and the government pretty much had to step in or see the entire lending apparatus of the United States grind to a halt. And, that’s not an exaggeration.