Opening Bell: Bear Country

Dow downers; Fed scrambles; one more Countrywide postmortem, etc.

Stock markets plunged on Thursday on worries about the health of the financial system and the economy as a whole.

The Dow Jones Industrial Average dropped 358 points or 3 percent to 11,453, the lowest level in nearly two years. The Wall Street Journal and Financial Times lead their front pages with the news, while The New York Times puts it on C1. Bloomberg says the 9.4 percent drop this month makes this the worst June since the Great Depression.

Shares in the financial sector&mdash led the declines and brought the Dow to the brink of an official bear market, which is when stocks fall 20 percent from their peak). The Dow is now off 19 percent from October and needs to fall 122 points to hit the bear mark, the Journal says. The NYT:

Downgrades in the financial industry and fear over the deteriorating health of the auto sector were the immediate causes of Thursday’s sell-off. But the abrupt reversal in the markets—only five weeks ago the Dow was flying above 13,000 —reflects the realization among investors that the troubles plaguing the economy may be worse than initially feared.

The WSJ raises an interesting comparison between the demise of the financial stocks and the popping of the tech bubble earlier this decade. Financials are off a whopping 50 percent from their highs, compared to the Nasdaq’s 60 percent plunge in the same amount of time in the tech bust.

The numbers—even after all these months—still shock: Lehman Brothers is down 74 percent. Citigroup is off 69 percent (that’s $180 billion in vanished value). Washington Mutual has lost 89 percent of its value. The Journal on C1 compares Wall Street analysts scrambling to downgrade each other’s banks to squabbling in a schoolyard.

But it wasn’t all financials getting hit. General Motors shares fell to their lowest level in fifty-three years, according to Reuters, the FT, and the Journal (thirty-four years, according to the NYT). Rumors, which were denied, spread that Chrysler is about to go broke. Weak reports from Nike and Oracle raised concerns about the health of consumers and businesses.

The NYT reports that credit markets are showing signs of more weakness. The cost of insuring against default has “widened greatly” recently. And the Journal’s Ahead of the Tape column says a volatility measure signals that the bottom hasn’t yet been reached.

Oil prices touched a record, hitting $140 a barrel after rising $5 on the day. The Journal posts a classic-style “leder” on A1 about two prominent Saudi oil officials’ dueling views on one of the big questions of our age: whether oil supplies have reached a peak.

Fixing a system in freefall

The Federal Reserve, in a bid to boost the financial system, said it would relax requirements on investing in banks by private-equity firms, the Journal reports on C1. The papers says such a move could “offer a lifeline to cash-strapped lenders desperate to secure capital,” but it appears that in so doing it would weaken oversight at a time when that’s especially unwise.

The gusher of capital needed to keep the banks afloat has shown signs of slowing recently because those who’ve invested, like the so-called sovereign-wealth funds, have lost their rear ends so far. So the Fed is scrambling to find somebody willing to salvage them.

Right now, any investor that owns 25 percent or more of a bank is subject to heavy regulation, the WSJ says. That’s due to federal law, but the paper says the Fed has “wiggle room” in interpreting the rules.

Still, as the paper points out, it’s far from certain that anyone wants to try to catch the falling knife by handing banks cash at a time like this. The paper notes in its Heard on the Street column that Merrill Lynch, for one, has hemmed itself in on how it can raise capital with concessions it made to previous investors.

The FT reports that the value of mergers and acquisitions in the first half of the year dropped by a third from a year ago. The NYT’s Floyd Norris takes an interesting look at one of the deals that fell apart.

Swiss cheeseballs

Massachusetts sued big Swiss bank UBS, saying it defrauded clients by selling them auction-rate securities, which it called as safe as cash, to get them off its own books, as the legal fallout from the credit bust grew, the Times reports on C1 and the Journal on C3.

The state found UBS emails dating back to August showing executives knew the $300 billion market, which provided long-term financing to governments and non-profit institutions at short-term prices, was in trouble. The Times:

As sellers began to outnumber buyers, the messages show, UBS executives urged the sales force to promote the notes and shares as aggressively and widely as possible.

“The thing that is most amazing to me is what a comprehensive and deliberate strategy this was by UBS,” (the top Massachusetts regulator) said. “They wanted to reduce their inventory, so they decided to gear up their sales campaign using cash-like arguments deliberately.”

The Journal reports that a company called Plug Power is suing UBS, saying the bank was telling it in October that the market was just fine. The NYT and the FT note that the Massachusetts lawsuit points to a top UBS exec, who’d better prepare his wrists for the cuffs. The NYT:

But in August, even as he was urging employees to drum up clients to buy the securities, Mr. Shulman began selling his personal stake in the instruments, the complaint said. By Dec. 12, Mr. Shulman had sold his entire position in the securities.

In bad economic news…

Bank of America said it would fire 7,500 workers in the next two years as a result of its merger with Countrywide, which apparently is still on for next week, despite the home lender’s growing legal troubles.

The economy grew a bit faster than originally estimated in the first quarter, rising 1 percent rather than 0.9 percent. That’s important insofar as it wasn’t adjusted downward.

Existing-home sales in May fell 16 percent from a year ago, but were up 2 percent from April. Prices were down 6.8 percent from a year ago. The four-week average of new jobless claims edged up to the highest since Hurricane Katrina three years ago.

The Washington Post columnist Steven Pearlstein is bleak about the prospects of the economy, and gets the Quote of the Day:

This thing’s going down, fast and hard. Corporate bankruptcies, bond defaults, bank failures, hedge fund meltdowns and 6 percent unemployment. We’re caught in one of those vicious, downward spirals that, once it gets going, is very hard to pull out of.

Another Countrywide autopsy

The Journal says on A3 that the “Friends of Angelo” Mozilo semi-scandal at Countrywide is widening.

The CEO got good mortgages for a casino employee and for a car dealer, as well as two former pro athletes. The casino employee was given big-time exceptions to get her loan, something the Journal notes isn’t a crime, but “isn’t necessarily in shareholders’ best interests.”

This is what happened internally when Mozilo suggested helping someone:

An employee working on it emailed his supervisor, “I WILL handle this one with ‘kid gloves,’ and this will be a HUGE win for us!” The supervisor then emailed to another colleague: “WOW! We have a referral from Angelo Mozilo.” The supervisor said she had told the person working on the loan “to handle it like it’s his mom’s loan and his life depends on it.”

There will be more like this coming out:

Mr. Mozilo regularly lined up loans for people he met, according to several current and former Countrywide executives. Said one: “Angelo would call in and say, literally, ‘My maid needs a loan.’”

Gates’s last day

The Times notes on A1 that today is Bill Gates last day as a full-time employee of Microsoft. The story is mostly a valueless sort of obituary for his working career, and duly notes with conventional wisdom the difficulties the software behemoth faces as the guard changes.

However, Microsoft is lagging badly in current round of Internet competition and, analysts say, is facing more formidable challengers this time—notably Google… Traditional desktop software—and the technology standards Microsoft controls there—matter far less when more software is accessed with a Web browser and delivered over the Internet from vast data centers run by Google and others. The new approach is known as “cloud computing,” and the business model behind it is typically to sell online advertising and software services.

Freight fix

The Journal on B2 reports that four airlines admitted guilt in a price-fixing case with the Justice Department and agreed to pay $504 million in fines. They conspired between 2001 and 2006 to fix cargo rates for international shipping, which the government said may have cost customers 10 percent more than it should have to ship their goods.

Still, if they only pay half a billion, the airlines (all foreign) will still make out. The government says the price fixing netted them billions of dollars.

Spitzer’s legacy

On its Business Day cover, the Times looks at New York Attorney General Andrew Cuomo, who it says is “shaking up the financial industry” in the footsteps of the disgraced Eliot Spitzer.

He’s using far less hardball tactics than the Spitz, though, and critics are saying he’s too easy on industry, notably in a recent settlement with the conflict-ridden credit-ratings firms.

“Spitzer did have a kind of a notion that there were bad people out there that ought to be taken down a peg or two or three or four,” said Richard Sylla, a financial historian at New York University. “Cuomo seems to be a little bit cooler.”

The Times doesn’t make much sense in saying Cuomo, unlike Spitzer, tries to “fight industry practices that his office believes have hurt investors, borrowers and homeowners.” So what was Spitzer’s $1.4 billion nailing of Wall Street over their shoddy research?

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.