News / US Equities

How to Turn $700 Billion Into $1 Trillion (or How to Lose $1 Trillion in One Day) By Bonner Dytoc October 02, 2008

While the financial industry in the U.S. is unraveling due to the crisis caused by the subprime meltdown, lawmakers are doing what they can to salvage the situation with a $700 billion rescue package. US President George W. Bush said it quite clearly, “we need this package or we can see a long and drawn out recession” or words to that effect.

Everyone was waiting for details of the rescue package the other week. The longer Congress delayed their decision, the more volatile the markets became due to lingering uncertainties.

Just this weekend, Congress finally agreed in principle to come out with the rescue package. However, since the general idea was to get the money from the taxpayers, the lawmakers rejected the package. It would have meant political suicide for them if they approved the plan, as there is only 2 months left before election time. Interestingly, there were more Republicans who voted against it than Democrats.

Due to rejection of the deal, the Dow Jones Industrial Average reacted almost instantly by dropping further from a loss of 300 points for the day to a loss of 777 points by the end of the day. This is biggest one-day drop for the US market and equates to a loss of $1 trillion in value in just one day.

And this was what rattled other major stock markets around the world. Our own PSE started the day with a steep drop of 6%. Other markets like Hong Kong, and Japan also followed suit. But most of these markets were also able to recover most of their losses by the end of the day. The PSE was able to recover and close just 37 points lower.

This still doesn’t answer the question, what happens to the US now that the rescue package they thought would help the situation is still in limbo? As of this writing, the US Congress is back to square one with hammering out the details of the package to something that’s more acceptable to lawmakers.

The taxpayers don’t want to pay for it and most probably want Wall Street to suffer the consequences since this whole thing is the Street’s fault. Wall Street will be hard pressed to search for that kind of money if it were to fund the bailout plan. What’s a congressman to do?

In the meantime, Bush appeared on TV briefly to reiterate his message, “we need this package or we’re frakked.” Of course, he didn’t use those exact words.