Sunday – Lehman Brothers, a 158 year old investment bank, declared bankruptcy after being unable to find any other firm around the world to merge with and the U.S. Government declined to help. Seeing the writing on the wall, 94-year-old Merrill Lynch agreed to be purchased by Bank of America for $50 billion (one-half of the company’s market value six months earlier).
Monday – Over the weekend AIG, the largest U.S. based insurance company, had gone to the U.S. Government and requested $20 billion to protect its credit rating, but was denied on Monday. The stock market was down 5%.
Tuesday – AIG was downgraded by credit rating agencies because of its weakening financial condition and plummeting stock price. The fear permeating the stock market now began to spread into the safer areas of the bond market. Usually a safe haven, most areas of the bond market began to drop as investors panic-sold bonds to (1) cover margin calls on their falling stock portfolios, and (2) move their funds into money market accounts. Late in the evening, AIG announced that the Government had provided the $85 billion necessary to boost its credit rating back up to where it had been on Monday prior to the downgrading. Yes, that’s right, what cost $85 billion on Tuesday would have cost $20 billion on Monday! The stock market was up 2%.
Wednesday – The fear permeating the stock and bond markets now began to spread into the very safest and most critical area of our financial system. Several well respected money market accounts announced that they were in jeopardy of principal losses and not being able to guarantee full return of the investors’ money. This caused further panic and selling in both the stock and bond markets. Financial system and economic problems appeared to be worsening and spreading. The stock market was down 5%.
Thursday – Realizing that a Depression-era run on the bank and a complete financial meltdown was at hand, the U.S. Government, after the stock market closed, announced that it would protect $3 trillion in money market accounts using the Exchange Stabilization Fund created in 1934. A mid-day rumor that this might occur and another that a bank bailout package was being discussed caused the stock market to rally late in the day from being down 2% to closing up 4% for the day.
Friday – The Government announced that a broad plan of policies and $700 billion in bailout programs are in the works to shore up our failing financial system. This news and the suspension of short-selling on 799 financial stocks pushed the market up 5% at Friday morning’s open before closing up only 4% for the day.
We have been exceedingly busy over the past weeks and months monitoring the financial markets and your portfolio. We will remain diligent in staying on top of the fast changing events. Thursday, when even money market accounts were in jeopardy, we came very close to moving all accounts substantially to the sidelines. However, due to various government bailout programs, we do not believe that it is best to be all out at this point in time. Nonetheless, we believe a more conservative stance is warranted. When the market recovery occurs there will be plenty of opportunities.