A strange calm comes over Wall Street

Credit markets loosen up while the Dow demonstrates great fortitude. Time to put on the party hats?

Published September 26, 2008 5:35PM (EDT)

It is the curse of the blogosphere that a horde of well-informed people feel compelled to share their thoughts as to what is happening during the current extraordinary sequence of political and economic earthquakes on a minute-by-minute basis. Thus we get blog posts like the one by Time magazine's excellent business reporter Justin Fox, "Capitalism Fails to Collapse. What's Up With That?", based on a couple of hours of mild ups and down in the the U.S. stock market Friday morning.

Fox makes some good points, and concludes that maybe the current crisis can be "steered in a direction where it could conceivably be resolved without emergency legislation right now." Put the lack of panic together with the criticism levied against the bailout plan by a proliferation of economists, on both the left and the right, and in the context of a country enraged at the prospect of a Wall Street rescue, and one can easily see the attraction in calling "timeout."

And yet, if the market goes into a nose dive in the last hour of trading today, the insta-analysis will take another wild swing. And there's still plenty to be nervous about. Exhibit A: the largest bank failure in our nation's history, which has somehow become little more than a footnote to the current drama.

As a lowly retail customer of Washington Mutual, I am naturally relieved that my financial affairs will be unaffected by this change in corporate ownership. This is not true for the people and institutions that bought $30 billion worth of WaMu bonds and other forms of debt. They are wiped out.

Now that the number $700 billion is in common parlance, $30 billion seems like chickenfeed. (It seemed a lot larger in April, when the Fed assumed liability for $30 billion in potential losses associated with the Bear Stearns rescue.) But on a normal day, when all of Wall Street's attention was not fixated on Washington political negotiations, while everyone else starts looking forward to tonight's debate, the evaporation of $30 billion would seem to me to be an enormously destabilizing catastrophe. I'd guess it would have to be the kind of "credit event" that would trigger the conditions of credit default insurance policies written against WaMu bonds. Justin Fox notes that credit markets seemed to be loosening a bit this morning, but tensions are still very high.

Who is next? Wachovia? Morgan-Stanley? And who could possibly stand ready to take on their liabilities? As a WaMu customer with a Countrywide mortgage, I personally salute JPMorgan Chase and Bank of America for their gargantuan appetites. But how many failures of major financial institutions can we witness before the bottom drops out? We may not need a rescue plan signed, sealed and delivered this instant, despite the impassioned pleadings of our current Treasury secretary and Federal Reserve Bank chairman, but taking no action doesn't seem to be a very prudent plan of action, either.

Or, as the equally well-informed Felix Salmon writes in response to the same Justin Fox post and the same market conditions, "Rather than immediate and certain financial chaos in the event the bailout doesn't happen, we'd just have contingent and could-happen-at-any-time financial chaos. Which is an improvement, but not much of one."

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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