What Now? Life After the Bailout Bill

Sept. 30, 2008— -- Stocks staged a partial recovery today following Monday's historic declines, with the Dow Jones Industrial Average rallying more than 480 points by the market's close. Optimism about the resurrection of a government financial system bailout plan and possible changes to accounting rules helped drive the rebound.

Concerns continued to grow, however, about the world's credit markets with news of a spike in the London Interbank Offered Rate, or LIBOR, the interest rate that banks charge to lend to one another.

The LIBOR increase means it will be more costly and challenging for businesses and consumers to borrow money. Interest rates on credit card debt and many adjustable-rate mortgages may also rise as a result of the increase.

"It just really highlights the complete and utter lack of faith and confidence in the banking system," said Liz Ann Sonders, the Senior Vice President and Chief Investment Strategist for Charles Schwab & Co. "If banks are unwilling to lend to each other they're most certainly not willing to lend to businesses or to us as consumers."

Proponents of a government bailout of the financial system have said that such a rescue plan -- which could allow the government to buy up banks' troubled assets -- could help ease the credit crisis. But that argument didn't stop the House of Representatives Monday from rejecting a $700 billion rescue plan.

With the prospects for the bailout now in limbo, exactly how bad will things get? It depends on who you ask.

The predictions on Wall Street are dire. Louis Alexander, the chief economist at Citigroup Inc., which on Monday announced it was buying the banking operations of Wachovia, said that even if a bailout bill is passed later this week, some damage has already been done.

"Each little bit of delay causes damage to the financial system that's hard to take back," Alexander said.

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But others say the bill's initial rejection may pave the way for measures that would help struggling homeowners.

The House of Representatives' stunning defeat of the rescue plan, which was backed by leadership in Congress and the Bush administration, left some questioning whether a bailout package will come to fruition at all.

Nerves have been especially frayed at the New York Stock Exchange, where the Dow Jones Industrial Average dropped more than 770 points Monday, a record decline.

David Henderson of Raven Securities, an independent broker, worried that continued uncertainty about the bailout would fuel further declines.

"If they don't do anything, it'll be a scary moment down here," he said, "and when you scare people, they do irrational things, and when irrational things start happening, you know, you're liable to ... see things plunge one way or another."

Kenneth S. Rogoff, an economics professor at Harvard University and a former economist at both the International Monetary Fund and the Federal Reserve, said he believed some sort of deal would ultimately receive congressional approval.

"The nature of these huge deals is always that they seem like they aren't going to happen until they happen," Rogoff said. "I think the overwhelming likelihood is that they will still reach an agreement with some tweaks."