All the papers lead with the fallout from the demise of Lehman Brothers and the sale of Merrill Lynch, two monumental events that shook up the markets and raised fears that the worst may still be to come for the U.S. economy. Investors were quick to press the sell button yesterday and they managed to plunge the Dow Jones industrial average 504 points, or 4.4 percent, which made it the worst one-day decline since the first day of trading after the Sept. 11 attacks. Markets across the world also dropped sharply, and several in Asia that were closed yesterday rushed to catch up on all the selling this morning. The Los Angeles Times, Washington Post, and Wall Street Journal all use banner headlines to emphasize the severity of the news and warn Wall Street insiders that they can look forward to lots of sleepless nights in the next few days—assuming, of course, that they're lucky enough to keep their jobs. For some, it's a race against time. The WSJ, which, once again, devotes most of its front-page real estate to the ongoing crisis, reports that Lehman officials were frantically working all day yesterday to try to sell off some of its most valuable businesses before it's too late.
While the problems originated in the real-estate market, the credit crunch "has emerged as a full-blown financial crisis threatening the global credit markets," declares USA Today. The New York Timesnotes that the downward spiral began as soon as the markets opened, "and the mood later turned even gloomier" despite efforts by the Bush administration to reassure investors. The LAT points out that, in fact, Treasury Secretary Henry Paulson's remarks, which were meant to give investors confidence, ended up having the opposite effect when he emphasized that the government isn't planning to intervene in the markets. "People don't believe anything that's being said," a stock trader tells the LAT. "They're selling first and asking questions later."
Despite all the bad news, the WP manages to keep some perspective and notes that while "it was a horrible day for the market, it was no worse than Treasury and Fed officials had expected when they declined to intervene to save Lehman." The WSJ agrees and points out that for most of the day most U.S. indexes were down 2 percent, "which, while a good-sized decline, was smaller than many had thought would be the case." But the markets plunged in the last hour of trading, largely due to concerns over the future of insurance giant American International Group, which was downgraded by major credit rating agencies late yesterday. AIG officials are now trying to raise as much as $75 billion after the Fed rejected its request for a $40 billion temporary loan. AIG shares were battered yesterday and plunged another 60 percent.
The WSJ notes that AIG "is such a big player in insuring risk for institutions around the world that its failure could shake the global financial system." Meanwhile, rumors continue to float around that if the company doesn't get fresh money by Wednesday, it might have to file for bankruptcy. In the NYT's op-ed page, Michael Lewitt argues that if AIG goes under, it will make the fall of Lehman look like a walk in the park. The insurance giant is involved with pretty much every financial institution in the world, but most importantly, "it is a central player in the unregulated, Brobdingnagian credit default swap market that is reported to be at least $60 trillion in size." And that's just an estimate, because no one really knows how big that market actually is. "Regulators knew that if Lehman went down, the world wouldn't end," writes Lewitt. "But Wall Street isn't remotely prepared for the inestimable damage the financial system would suffer if AIG collapsed."
While investors keep one eye on AIG this morning, the other will be firmly fixed on the Federal Reserve. Fed leaders weren't planning on cutting interest rates at their regularly scheduled meeting today, and the WP says their plans are unlikely to change. The NYT, however, says Fed leaders are considering it, but it "is far from a certainty." The WSJ reports that while officials aren't eager to change the rate now, the thinking could change if the markets are in free-fall by the time they gather. And even if they don't actually cut rates today, officials could still hint that they will do so in the future if market conditions worsen.
Still confused about what's actually happening on Wall Street and why? The NYT's Joe Nocera does an admirable job today in getting past the confusing aspects of the crisis to clearly explain the situation. Once "you get past the mind-numbing complexity of the derivatives that are at the heart of the current crisis, what's going on is something we are all familiar with: denial." Just like homeowners across the country had a hard time recognizing that their homes weren't worth as much as they thought, big Wall Street firms have also been late to admit that their investments suddenly "weren't worth very much." Lehman, for example, could have probably been saved if its executives had been willing to lower the price of its securities.
Besides, they were probably thinking that if worst came to worst, the federal government would come to the rescue at some point. As the WP details in a Page One reconstruction of the weekend's events, it seems the Wall Street insiders simply weren't willing to believe Bush administration officials when they said over and over again that no taxpayer money would be used to rescue troubled companies.
Meanwhile, the Wall Street mess has become fodder for the presidential candidates on the trail. The WP notes that after two weeks where Sarah Palin dominated the news, "the campaign may be heading back to fundamentals." John McCain "faces the bigger challenge" because he must find a way to separate himself from the current administration. But that doesn't mean Obama will have an easy time since he has "struggled through much of the year to develop a compelling economic message." Neither candidate brought any fresh ideas to the table yesterday, but there was plenty of back-and-forth after McCain declared in his first event of the day that "the fundamentals of our economy are strong." His tone quickly changed as the day wore on, but Obama was quick to challenge his opponent, not only for what he said but also by tying him to an economic worldview that opposes tougher regulations.
In a Page One piece, the NYT essentially says that Obama's portrayal of McCain is accurate because he has always "been in his party's mainstream on the issue" and has often championed deregulation. Now he's trying to talk more positively about government regulation even as some of his closest financial advisers include some of the most prominent deregulators. As much as all this may seem to be good news for Obama, the Democratic nominee can win from this only if he manages "to convince voters he's going to change their lives," writes Slate's John Dickerson. "He can't use it as merely another opportunity to paint McCain as out of touch."
In other election news, the NYT points out that after lots of talk on the issue it seems independent groups are gearing up for a comeback in the presidential race. These groups have so far been on the sidelines but are starting to take on a more prominent role as the campaign enters its final weeks. Although both candidates once tried to discourage these groups from operating, they now seem to be more willing to look the other way. Now that the groups can campaign until Election Day, it's predicted that many of these ads will seemingly come out of nowhere and overwhelm voters in battleground states, even if it's unlikely they'll reach the same levels of activity as in 2004.
The NYT got a hold of some intercepted telephone calls that the Georgian government insists prove that Russian forces moved into separatist South Ossetia almost a day before Georgia attacked. This is part of Georgia's effort to dispel talk that the war with Russia broke out only once Georgia decided to attack and to try to portray its actions as defensive rather than offensive. Russia, of course, denies the claim and says the troop movements were part of the normal rotation of peacekeepers in the area. The paper talks to analysts and says that while the evidence is hardly conclusive, it does at least seem to show that the Russian military moved "earlier than had previously been acknowledged."
In continuing with the trickle of hints that have been coming out and suggesting that the United States plans to be in Afghanistan for a long time, USAT says the Pentagon is seeking to fill new interrogator and intelligence analyst jobs at the bigger Bagram prison that is scheduled to open next year.
The LAT takes a look at how the United States is quickly losing influencing in Iraq as Prime Minister Nouri al-Maliki has managed to consolidate his power. Although Maliki once depended on Washington support, he's now placing demands of his own on the U.S. military and is now asking that U.S. forces withdraw from all cities by June. Although in some ways this is what U.S. officials wanted, it also means that Iran is now in a better position to influence the Iraqi government because of the close economic and political ties between the two countries. Analysts say the next president will have to work quickly in order to prevent the United States from losing all its leverage in Iraq.
The WP notes that the new book by reporter Barton Gellman on Vice President Cheney, which was dramatically excerpted in the paper on Sunday and Monday, reports that former House Majority Leader Richard Armey of Texas says Cheney told him that Iraqi President Saddam Hussein had personal ties to al-Qaida in the run-up to the Iraq war. Cheney's statements "crossed so far beyond the known universe of fact that they were simply without foundation," writes Gellman. Armey, a Republican, had spoken up against the war but reversed himself after Cheney warned that Iraq posed a bigger threat than what the administration was willing to say publicly. "Did Dick Cheney ... purposely tell me things he knew to be untrue?" Armey asked. "I seriously feel that may be the case."