Lehman to Cut 750 Jobs in European Fixed-Income Unit

Lehman Brothers Holdings Inc., the securities firm that filed for bankruptcy two weeks ago, will eliminate 750 jobs in its European fixed income and personal investment management units after talks to find a buyer failed.

The cuts, which will fall mainly in fixed income, are effective today, PricewaterhouseCoopers, Lehman's bankruptcy administrator in the U.K., said in a statement on its Web site. The bank employed about 4,500 staff in London's Canary Wharf.

The job losses will add to the 130,000 positions financial firms worldwide have eliminated in the past year as global credit markets collapsed. PwC had been trying to sell the fixed income business, and save some of the unit's jobs, after Japan's Nomura Holdings Inc. agreed to buy the European investment banking and equities units last week.

``It is extremely disappointing that despite exhausting all avenues these jobs could not be saved,'' PwC partner Tony Lomas said in the statement. ``We continue to be focused on maximizing the value of recoveries for creditors, whilst minimizing the impact on other stakeholders as much as possible.''

London alone will suffer almost 20,000 job reductions in 2008 and 2009, according to estimates from the London-based Centre for Economics and Business Research.

Nomura, Japan's biggest securities firm, agreed to buy Lehman's Asian-Pacific unit. London-based Barclays Plc purchased Lehman's U.S. investment banking unit for $250 million.

Lehman, once the fourth-biggest U.S. securities firm, filed for bankruptcy on Sept. 15 after losing 94 percent of its market value this year, succumbing to the subprime mortgage crisis it helped to create.

PwC is seeking to recoup about $8 billion in cash the U.S. parent allegedly withheld before it filed for bankruptcy. The firm is seeking to recover the cash to pay creditors in Europe.

Euro Falls Most Against Dollar Amid European Banking Failures

The euro fell the most against the dollar since the introduction of the shared currency in 1999 after France and Belgium led a state-backed rescue of Dexia SA, as the widening financial crisis forces governments to prop up financial institutions across Europe.

The 15-nation currency also weakened against the British pound after Belgian Prime Minister Yves Leterme said Dexia, the world's biggest lender to local governments, will receive about $9.2 billion to shore up its capital. The dollar rose against the yen on speculation the U.S. Senate will salvage a $700 billion bank-bailout plan as early as tomorrow after Congress rejected it yesterday.

``The consensus is the U.S. banking system is a little bit further along in its exposure of its toxic assets,'' said Firas Askari, head currency trader at BMO Nesbitt Burns in Toronto. ``It's a case of which is relatively worse. The dollar's going to benefit against the euro because Europe has more to expose.''

The euro fell 2.5 percent to $1.4079 at 11:55 a.m. in New York, from $1.4434 yesterday. The euro also slid to 149.10 yen from 150.38. It earlier reached 148.55, the weakest since Sept. 16. The yen weakened to 1056.93 per dollar from 104.18, after earlier reaching 103.54, also the most since Sept. 16.

The capital infusion for Dexia comes two days after Belgium, the Netherlands and Luxembourg rescued Fortis, the largest Belgian financial-services company, Britain took control of Bradford & Bingley Plc, the country's biggest lender to landlords, and Germany bailed out Hypo Real Estate Holding AG.

Implied volatility on one-month euro-dollar options rose to 16.9575 percent, or the highest in almost eight years. On Sept. 18, it reached 15.55 percent, the same level that triggered the Group of Seven nations to buy euros in 2000 to halt the 27 percent slide from its 1999 debut.

`Fundamentals Are Irrelevant'

Banks are being squeezed amid a surge in borrowing costs as lenders hoard cash on concern more financial institutions will fail. The euro interbank offered rate, or Euribor, that banks charge each other for one-month loans climbed to a record 5.05 percent today, the European Banking Federation said.

The London interbank offered rate, or Libor, that banks charge each other for such loans in dollars climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers' Association said.

``There's a dollar shortage globally,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``Demand for liquidity trumps the fundamentals. Fundamentally, the U.S. is awful, and Europe is awful. Fundamentals are irrelevant today.''

Cross Currency Swaps

Foreign banks are paying the highest premiums in at least a decade to borrow in dollars in the swaps market even after the Federal Reserve more than doubled the amount of funds available to other central banks yesterday by expanding swap lines.

The Fed's actions included increasing existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

The price on one-year cross-currency basis swaps between yen and dollars reached minus 70 basis points, the biggest effective premium for dollar funding since Bloomberg began tracking the data in 1997. The highest reached in 1998, during the Asian banking crisis was minus 38.5 basis points in October 1998, according to Bloomberg data.

`Mad Scramble'

``There is a mad scramble for U.S. dollar funding demand from a global U.S. dollar-based financial system,'' said Claudio Piron, Singapore-based head of Asian currency research at JPMorgan Chase & Co, the second-biggest U.S. bank by market value. ``Central banks have been extending swap lines as lenders of the last resort. The banks access this liquidity, but they hoard it for themselves as they believe it too risky to lend to anyone else.''

The U.S. Senate will try to revive a $700 billion financial-rescue package after yesterday's defeat in the House of Representatives. The bill would have allowed the government to buy troubled assets from banks. Institutions posted $590 billion of losses and writedowns since the start of last year following the collapse of the U.S. subprime-mortgage market.

Rising Yen

Higher-yielding currencies recouped losses against the Japanese yen as Europe's benchmark Dow Jones Stoxx 600 Index gained 1 percent. The Australian dollar rose 1.2 percent to 84.84 yen after falling 4.9 percent yesterday. The New Zealand dollar gained 2.2 percent to 71.55 yen after dropping 3.7 percent yesterday.

``I would be very cautious in betting on further near-term dollar-yen losses,'' said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt. ``Any positive news on the political front would have quite an impact.''

The yen typically declines when demand for high-yielding currencies rises, as traders put on so-called carry trades. In such transactions, investors get funds in countries with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 7 percent in Australia and 7.5 percent in New Zealand.

The yen rose the most of all 16 most-actively traded currencies yesterday after the Standard & Poor's 500 Index plunged the most since the 1987 crash.

The Japanese currency is up 12 percent against the euro this quarter. The dollar has fallen 0.3 percent against the yen, paring a 7 percent gain in the previous three months. The euro is down 11 percent against the dollar.

U.S. Stocks Rally on Speculation Bank Rescue Plan Will Pass

U.S. stocks rose as growing expectations that lawmakers will salvage a $700 billion bank- rescue package helped the Standard & Poor's 500 Index recover more than a third of yesterday's 8.8 percent plunge.

JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. jumped more than 10 percent as President George W. Bush urged the passage of bailout legislation and congressional leaders vowed to resume work on the bill after its defeat spurred the S&P 500's biggest decline in two decades. Hess Corp. and Schlumberger Ltd. rose more than 6 percent as optimism about the plan helped oil rebound from a $10-a-barrel drop. Even with the gains, the S&P 500 is poised for its worst September since 2002.

``The market appears hopeful something will happen,'' said John Carey, a Boston-based money manager at Pioneer Investment Management, which oversees about $300 billion. ``There's the thought Congress will come back to this bailout proposal. That's the expectation. The market debacle yesterday seems to have gotten people's attention in Washington.''

The S&P 500 rose 35.77 points, or 3.2 percent, to 1,142.16 at 12:42 p.m. in New York. The Dow Jones Industrial Average gained 267.69, or 2.6 percent, to 10,633.14 after falling a record 777.68 points yesterday. The Nasdaq Composite Index added 3.3 percent to 2,048.5. European stocks rose, while Asian shares declined. Government bonds in the U.S. and Europe fell. The dollar climbed the most against the euro since the shared currency's 1999 introduction.

About 531 million shares changed hands on the floor of the New York Stock Exchange, 17 percent more than at the same time a week ago. Two stocks climbed for each that fell on the Big Board.

`Black Monday'

Speculation the rescue plan will be revived overshadowed the biggest-ever jump in the cost of borrowing dollars overnight. More than $1 trillion in market value was erased yesterday in the worst day for stocks since the ``Black Monday'' crash of 1987 after the House of Representatives voted down the plan designed to rid financial institutions of bad loans.

The S&P 500 has declined 11 percent in September and the Dow average has lost 7.7 percent. The Nasdaq is down 13 percent. The S&P 500 has retreated 11 percent since the end of June for its fourth-straight quarterly decline, the longest stretch since 2001. The Dow has slipped 6.1 percent and the Nasdaq is down 11 percent.

The MSCI World Index of 23 developed nations has dropped 12 percent this month as almost $600 billion of credit losses and writedowns at financial institutions worldwide prompted banks to hoard cash, forced Lehman Brothers Holdings Inc. into bankruptcy and spurred government seizures of American International Group Inc. and the U.K.'s Bradford & Bingley Plc.

Valuation Drops

Financial companies in the S&P 500 this month traded at 1.1 times their book value, the lowest valuation since Bloomberg began tracking the data in 1995. Commercial banks in the gauge trade at 0.8 times book value, also a 13-year low.

JPMorgan, the biggest U.S. bank by deposits, climbed 12 percent to $45.97. Citigroup rose 15 percent to $20.44. Bank of America surged 11 percent to $33.47. Goldman Sachs Group Inc. increased 4.6 percent to $126.21 and Morgan Stanley gained 12 percent to $23.50.

Bush said yesterday's defeat of the plan ``is not the end of the legislative process'' and failure by Congress to act would cause ``painful and lasting'' damage to the economy.

Christopher Dodd, chairman of the Senate Banking Committee, said senators may deal with the bill as early as tomorrow. Democratic presidential candidate Barack Obama called for calm after the House vote, saying the plan ``will get done.'' Republican nominee John McCain urged lawmakers to ``go back to the drawing board'' and come up with legislation that will pass.

Regionals Rebound

The S&P 500 Regional Banks Index of 12 stocks climbed 11 percent after plunging 24 percent yesterday, its biggest tumble since the gauge was created in 2003.

Sovereign Bancorp, which plummeted 72 percent yesterday, recovered 71 percent to $3.99. National City Corp., Ohio's largest bank, climbed 38 percent after losing 63 percent yesterday.

The London interbank offered rate, or Libor, that banks charge each other for overnight loans jumped 431 basis points to an all-time high of 6.88 percent, the British Bankers' Association said today.

Hess, the fifth-biggest U.S. oil company, added 6.8 percent to $81.26. Schlumberger, the largest oilfield-services contractor, climbed 6.1 percent to $78.25. Crude for November delivery rose $1.96, or 2 percent, to $98.33 a barrel on speculation that new action on the rescue plan may avert an economic slowdown that would curb demand.

Microsoft, Schering-Plough

Officials from Microsoft Corp. to Office Depot Inc. and Schering-Plough Corp. said the government's failure to bail out the U.S. banking industry put the entire economy at risk unless a deal comes soon. They called on lawmakers to put aside partisan differences and work to restore credit supplies and confidence to the financial markets.

Microsoft, the world's biggest software maker, added 3.3 percent to $25.83. Schering-Plough, the Kenilworth, New Jersey- based drugmaker, rose 1.3 percent to $17.74. Office Depot, the second-largest office-supplies company, gained 1.8 percent to $5.78.

Dr Pepper Snapple Group Inc. advanced 6.7 percent to $25.91. The drinks maker spun off by Cadbury Plc this year was picked to replace Wm. Wrigley Jr. Co. in the S&P 500.

The benchmark index for U.S. stock options slid 12 percent to 41.20 after closing yesterday at a record 46.72. The VIX, as the measure is known, is considered the market's ``fear gauge'' because it tends to rise as stocks fall.

Dow Theory

Transportation stocks are signaling U.S. shares may be poised for more losses, according to Dow Theory, which holds that the 30-stock industrial average takes cues from the Dow Jones Transportation Average. The gauge of companies such as FedEx Corp. and Ryder Systems Inc. slid to the lowest level since March 17 yesterday, suggesting the industrials' plunge won't mark its bottom, some investors said.

Europe's Dow Jones Stoxx 600 Index added 1.8 percent today as Dexia SA, the world's biggest lender to local governments, climbed 6.1 percent on a 6.4 billion-euro ($9.2 billion) state- backed rescue.

Anglo Irish Bank Corp. Plc rallied 67 percent after Ireland's government said it will guarantee bank deposits and debts for two years, seeking to restore confidence in the country's financial industry.

German bank rescued from bankruptcy

THE German bank Hypo Real Estate (HRE) was granted a last-minute "multi-billion euro" credit line from a consortium of German banks that allowed it to avoid declaring bankruptcy, it said today.
A consortium has provided the troubled real estate lender "a major new credit facility which is designed to shield the company from the impact of the current malfunctioning of the international money markets," a statement said.

The unspecified amount was "sufficient to cover the group's funding needs well into the future," it added.

The German central bank and the stock market watchdog BaFin said separately that they "felt that Hypo Real Estate's viability was thus guaranteed".

The lender had launched talks with unidentified German banks "in response to the extremely challenging conditions on the international money markets following the Lehman collapse and other market disruptions," HRE said in reference to the bankrupt US investment bank Lehman Brothers.

Banks that normally borrow money on interbank markets have seen that source dry up since the US subprime mortgage crisis erupted more than a year ago, and institutions that depended on regular refinancing of their debts have run into crisis.

The daily Financial Times Deutschland today reported that private German banks had been trying "feverishly" to find a way to rescue the institution, hit hard by the US subprime loan crisis that began in August 2007.

The report said the bank, which is listed among Germany's 30 blue chip Dax index companies, had fallen victim to speculation by its German-Irish unit Depfa.

The paper said Depfa had pursued long-term projects with heavy loans and generally ensured refinancing only at the last minute, which due to the current global credit crunch was no longer possible.

HRE would have to pick up the tab for the refinancing, estimated to be in the double-digit billions of euros (dollars) range, according to the report.

"It is highly unlikely at the present time that HRE will be able to come up with that amount," the paper wrote ahead of the reported rescue package.

HRE operates in three sectors: commercial real estate; public sector and infrastructure finance; and capital markets and asset management.

Most Asian markets sink after US lawmakers reject bailout, Wall Street's plunge

Most Asian stock markets fell Tuesday in stunned dismay over U.S. lawmakers' rejection of a $700 billion bank rescue plan aimed at stabilizing the U.S. financial system. European markets opened mixed.
Markets across Asia opened sharply lower amid fears that the setback could lead to a broader global financial crisis. But as trading progressed, many indices erased losses and Hong Kong's market staged a dramatic turnaround to close slightly higher as investors scooped up beaten-down shares.
Japan's benchmark Nikkei stock 225 index slumped 4.12 percent to close at 11,259.86—the lowest level since June 9, 2005. In Australia, the S&P/ASX-200 index fell 4.3 percent after falling as much as 5.3 percent.
The bailout rejection dealt a "severe blow to Asia markets right after the Lehman shock," said Mitsushige Akino, fund manager at Ichiyoshi Investment Management in Tokyo, referring to the collapse earlier this month of the U.S. investment bank.
Even if it does passes, the bailout is seen as the beginnning of long, arduous process at cleaning up the bad debt mess.
"Many investors grew even more cautious because of the latest development over the (bailout) bill, and they only see passage of the bill as a minor improvement to the crisis," Akino said.
A couple markets bounced back in signs that some investors thought shares were oversold. Hong Kong's Hang Seng index gained 0.76 percent to close at 18,016.21 after earlier plunging more than 5 percent. India's Sensex was up 2.4 percent in afternoon trading.
European markets were modestly mixed in early trading Tuesday, with Britain's FTSE 100 little changed at 4,817.79 and France's CAC up 0.3 percent.
In Russia, regulators halted trading on its two major stock exchanges Tuesday after markets there opened significantly lower.
Investors were stunned by the U.S. House of Representatives' rejection Monday of a $700 billion emergency bailout package that would have allowed the government to buy bad mortgages and other sour assets held by troubled banks and other financial institutions.
With elections in November, many lawmakers were unwilling to take the political risk of supporting a measure that many American voters see as an undeserved bailout for rich, reckless investment bankers.
"This is a bad development," Australian Prime Minister Kevin Rudd told reporters in Australia's capital, Canberra. He urged U.S. lawmakers to urgently return to negotiations to come up with a deal that will prevent further infection of world markets.
In New York, the Dow Jones industrial average plunged 777 points, its biggest ever single-day drop, or nearly 7 percent, to 10,365.45, its lowest close in nearly three years.
U.S. stock index futures were higher, suggesting Wall Street would recover when it opens Tuesday.
Japanese Prime Minister Taro Aso urged the country's financial officials to closely monitor the situation and take appropriate measures to protect the world's No. 2 economy, according to Kyodo News agency.
"We have to respond appropriately in order not to affect the Japanese economy and to prevent the financial system from falling apart," Aso was quoted as saying.
Japan's banks have relatively little exposure to the bad mortgages at the core of the global credit crisis, but investors are worried that a slowdown in the U.S. and global economy will hurt demand for exports.
The Bank of Japan on Tuesday morning pumped another 3 trillion yen ($28.7 billion) into money markets, as part of efforts by central banks worldwide to boost liquidity and bolster interbank lending. That brings the BOJ's total injection to 21 trillion yen ($200.6 billion) since the collapse of Lehman Brothers Holdings Inc. earlier this month.
The chaos sapped the dollar overnight. The greenback was trading at 104.32 yen Tuesday afternoon in Asia from above 106 yen a day earlier, adding further pressure on major exporters.
Markets in mainland China are closed this week for National Day celebrations, and Hong Kong will be closed Wednesday.

Lehman Sells Unit to Bain, Hellman for $2.15 Billion

Lehman Brothers Holdings Inc. agreed to sell its investment-management unit to Bain Capital LLC and Hellman & Friedman LLC for $2.15 billion as the New York-based firm liquidates assets in bankruptcy.

The transaction includes Lehman's Neuberger Berman money- manager division, which oversees about $130 billion, as well as part of a private-equity group that invests in leveraged buyouts and real estate, the companies said today in a statement. Lehman, which filed for bankruptcy on Sept. 15, has sold its North American investment-banking division and European operations.

Private-equity firms were the only bidders in a rushed auction of the unit after Lehman went bust. They were attracted by a business with $230 billion in customer assets and a steady cash flow that would have fetched more if not sold under duress.

``They're certainly not buying this at the top of the market,'' said Steven Kaplan, a professor at the University of Chicago Graduate School of Business who studies private equity. ``It's somewhat of a distressed sale. If you're betting this is the bottom of the cycle, it's an awesome business.''

The two firms will own the business together through an all-cash transaction, according to the statement. Executives and portfolio managers will have equity stakes that may increase over time, the firms said.

Roy Neuberger and Robert Berman founded the firm that bears their names in 1939 to serve wealthy clients. During the 1950s, it was among the first firms to offer customers mutual funds that didn't charge transaction fees. Neuberger, now 105, retired before the 1987 stock-market crash. The fund unit oversees $130 billion.

Private-Equity Funds

Lehman Chief Executive Officer Richard Fuld bought Neuberger in 2003 for $3.2 billion to expand the firm's wealth- management business and later consolidated its asset-management operations into a single division. He had hoped to hold onto a stake in the unit as part of his failed plan to keep the 158- year-old firm afloat.

Also included in the sale are portions of Lehman's $35 billion private-equity business, managed by Michael Odrich, a 22-year Lehman veteran. That unit manages almost 40 funds.

Odrich will join the new company, as will Tony Tutrone, head of the private funds investment group. The transaction doesn't include Lehman's merchant-banking business, real estate, venture capital or certain hedge funds, according to the statement.

The sale also doesn't include Lehman's private-investment- management division, which the firm agreed to sell separately to Barclays Plc. London-based Barclay's last week concluded its purchase of Lehman's North American investment-banking business.

Lehman must get approval for the sale to the buyout firms in federal bankruptcy court, where Judge James Peck will determine whether the auction drew the best possible price from a full field of bidders. The sale doesn't include Lehman's stakes in hedge-fund managers GLG Partners Inc. and Ospraie Management LLC.

Other Bidders Withdrew

While Bain and Hellman & Friedman initially bid separately, they teamed up after firms including Blackstone Group LP, Carlyle Group, Clayton Dubilier & Rice Inc. and KKR & Co. LP dropped out. Prior to bankruptcy, the investment-management unit was valued at as much as $10 billion.

Hellman & Friedman bought fund manager Gartmore Investment Management Plc in 2006 for about 500 million pounds ($927 million), gaining $47 billion in assets under management. The San Francisco-based firm helped create Farallon Capital Management LLC, the San Francisco-based hedge-fund manager founded by Thomas Steyer, and invested in Franklin Resources Inc., the San Mateo, California-based owner of the Franklin and Templeton mutual funds.

The purchase reunites Chairman Warren Hellman, a former Lehman president, with a piece of the firm he once ran. He left Lehman in 1977 and four years later moved to San Francisco, founding his firm with Tully Friedman in 1984.

Bain, also founded in 1984, most recently teamed with Blackstone to buy the Weather Channel with NBC Universal Inc. Previous financial-services deals included the purchase of Web broker Datek Online Holdings Corp.

Citigroup Agrees to Buy Wachovia's Banking Business

Citigroup Inc., the biggest U.S. bank by assets, will acquire banking operations of Wachovia Corp. for about $2.16 billion after shares of the North Carolina lender collapsed under the weight of overdue mortgages.

The all-stock deal equals about $1 a share for the Charlotte-based bank, ranked sixth by assets in the U.S. All depositors will be protected, according to the Federal Deposit Insurance Corp., which helped broker the takeover by Citigroup. The New York-based bank plans to cut its own dividend in half and raise $10 billion in capital as it takes on Wachovia's senior and subordinated debt.

Wachovia is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and Washington Mutual Inc. into bankruptcy and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos. The purchase gives Citigroup about 3,300 branches and offices in 21 states. Wachovia will continue to own the A.G. Edwards Inc. brokerage and the Evergreen mutual-fund family.

```The problem must have occurred last week with their ability to continue to attract and hold deposits after the failure of Washington Mutual,'' said Gary Townsend of Hill- Townsend Capital in Chevy Chase, Maryland. ``On Thursday and Friday they must have had a large run on the bank.''

Wachovia's stock, which finished last week at $10 on the New York Stock Exchange, traded for 95 cents at 9 a.m. in early transactions. It had lost 83 percent in the past two years as of last week. Trading today was halted during regular hours. Citigroup gained 4.5 percent to $21.06 as of 12:01 p.m.

Citigroup's Role

Citigroup will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the FDIC said in a statement. The regulator will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants.

``Of course they are going to raise capital,'' Oppenheimer & Co. analyst Meredith Whitney said in an interview on CNBC. ``I don't know how they absorb $42 billion on the income basis they have.''

Wells Fargo & Co. had also bid for Wachovia, according to the Wall Street Journal.

``Citi needed it more than anybody,'' said Nancy Bush, an independent bank analyst. ``It would have been nice for Wells, but I couldn't see them taking on that chunk of bad debt.''

Citigroup expects $3.7 billion in pretax restructuring charges for severance costs over the next four years, the company said in a statement.

What's Left

The combined company will have about 4,300 U.S. bank offices and more than $600 billion in deposits for a 9.8 percent share of the U.S. banking market. Citigroup's total deposits globally will be $1.3 trillion, the bank said, or about $350 billion more than JPMorgan Chase & Co.

Wachovia will be left with its retail brokerage and Evergreen asset management units. The brokerage has about 14,600 financial advisers and more than $1 trillion under management, making it third in the U.S. behind Merrill Lynch & Co. and Citigroup's Smith Barney unit.

The FDIC said that it won't have to tap its insurance fund, something the agency also avoided in the WaMu failure last week. Keeping the FDIC's fund healthy has been a priority for U.S. regulators because its $100,000 insurance on deposits helps keep small depositors from panicking when a bank's health is questioned.

Whitney said today there was ``no doubt'' in her mind that there had been a run on Wachovia.

Customer Relations

Wachovia CEO Robert Steel sent a memo to the staff last week affirming that the company was sound and more diversified than Washington Mutual after the lender failed. The memo, according to a copy obtained by Bloomberg, included a set of questions and answers for employees who might have to answer queries from worried customers, such as ``Does all the recent news put Wachovia at risk?'' and ``How is Wachovia different'' from Lehman, Bear Stearns and WaMu.

Louise Pitt, a credit analyst at Goldman Sachs Group Inc., wrote Friday that Wachovia may have been facing the possibility of a ``silent'' run on deposits similar to that confronted by WaMu, in which customers fearful of a bank failure withdraw their money in unusually large numbers. WaMu became ``unsound'' after customers withdrew $16.7 billion since Sept. 16, the Office of Thrift Supervision said when it seized WaMu.

The FDIC and Wachovia didn't say today whether the bank suffered similar withdrawals.

Loan Defaults

Wachovia reported $9.7 billion of losses in the first half of 2008. The slide toward collapse began when the bank paid more than $24 billion in October 2006 for Golden West Financial Corp., the California lender that specialized in option-ARM home mortgages. The bank holds about $122 billion of the adjustable- rate home loans. Kennedy Thompson, the chief executive officer at the time, later admitted that the purchase at the height of the real estate boom was ill-timed.

Wachovia is the largest holder of option ARMs, ahead of Washington Mutual, the Seattle-based lender that collapsed last week. The loans are prone to default because they allow borrowers to skip some interest payments and add them to the principal. The terms backfired when housing markets weakened, leaving borrowers with loans bigger than the value of their home. Prices in California during August fell 41 percent from year-earlier levels.

Pressure From WaMu

Pressure on the bank to make a deal grew last week when JPMorgan Chief Executive Officer Jamie Dimon bought WaMu and then announced writedowns on loans similar to those held by Wachovia.

``Jamie Dimon threw gas on the fire when JPMorgan built in losses of 25 percent on the Washington Mutual option ARMs,'' Bush said yesterday. Steel ``has put his losses at 12 percent, but that was a couple of weeks ago and the situation has gotten more dire since then.''

Analysts at Fitch Ratings predict default rates on such loans packaged as securities may reach 45 percent.

``Bob Steel missed the opportunity to raise more equity,'' Townsend said. ``What we heard from him from the beginning is that they didn't need to raise more equity. That clearly wasn't the case.''

The transaction is likely to hurt Charlotte, where Wachovia is the largest private employer with about 20,000 workers, said Michael Nix, portfolio manager at Greenwood Capital Associates LLC in Greenwood, South Carolina. The bank said today in a statement that the corporate headquarters will stay in Charlotte.

``It's a bad, bad thing for Charlotte,'' Nix said. ``The only good thing about this is that we really don't know who else is left to have similar problems. The big guys are done.''

Fed Pumps Further $630 Billion Into Financial System

he Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

The Fed's expansion of liquidity, the biggest since credit markets seized up last year, came hours before the U.S. House of Representatives rejected a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone.

``Today's blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, ``the Fed's balance sheet is about to explode.''

The MSCI World Index of stocks in 23 developed markets sank 6 percent, the most since its creation in 1970. Credit markets deteriorated further as authorities tried to save more financial institutions from collapse.

European Rescue

European governments have rescued four banks in two days and the Federal Deposit Insurance Corp. said today it helped Citigroup Inc. buy the banking operations of Wachovia Corp. after its shares collapsed. The Standard & Poor's 500 Index fell 3.8 percent and the cost of borrowing dollars for three months rose to the highest since January. The rate for euros hit a record.

``If people think the authorities may give in to fears, they are wrong,'' Financial Stability Forum Chairman Mario Draghi said today in Amsterdam, where the international group of regulators and finance officials is meeting. ``There is willingness and determination on winning the battle to restore confidence and stability.''

Banks and brokers have slowed lending as they struggle to restore their capital after $586 billion in credit losses and writedowns since the mortgage crisis began a year ago. The bankruptcy of Lehman Brothers Holdings Inc. also sparked fears among banks they wouldn't be repaid by counterparties, driving up the cost of short-term loans between banks.

Funding Risk

``By committing to provide a very large quantity of term funding, the Federal Reserve actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk,'' the central bank said.

The Bank of England and the ECB will each double the size of their dollar swap facilities with the Fed to as much as $80 billion and $240 billion, respectively. The Swiss National Bank and the Bank of Japan will also double their dollar swap lines, while the central banks in Australia, Norway, Sweden, Denmark and Canada tripled theirs.

All the banks extended their facilities until the end of April 2009.

The Fed is also increasing the size of its three 84-day TAF sales to $75 billion apiece, from $25 billion. That means the Fed will make a total of $225 billion available in 84-day loans. The central bank will keep the sales of 28-day credit at $75 billion.

Special Sales

In addition, the Fed will hold two special TAF sales in November totaling $150 billion so banks can have funding available for one or two weeks over year-end. The exact timing and terms will be determined later, the Fed said. The TAF program began in December, totaling $40 billion.

The bank-rescue plan being debated by Congress today would give the Fed more power over short-term interest rates by providing authority as of Oct. 1 to pay interest on reserves held at the central bank by financial institutions. That would make it easier for the Fed to pump funds into the banking system.

Paying interest on reserves puts a ``floor'' under the traded overnight rate, which would allow a central bank ``to provide liquidity during times of stress'' without affecting the rate, New York Fed economists said in a paper last month.

Alitalia Pilots Agree to Government-Backed CAI Bid

Alitalia SpA, Italy's national airline, moved a step closer to averting collapse after pilots agreed to a government-backed takeover by a group of business executives.

Unions representing most of Alitalia's 2,500 pilots reached an accord with the CAI group led by Roberto Colaninno early today. The Rome-based carrier's ground staff had already approved the plan to eliminate about 3,000 jobs and impose longer hours for the same pay. Flight attendants unions said they are ``making some progress'' and will meet with CAI again on Sept. 29.

``The agreement with pilots allows us to look at coming days with great serenity,'' Transport Minister Altero Matteoli told Sky TG24 television in an interview broadcast today. ``Now we can let planes take off.''

Colaninno, chairman of scooter maker Piaggio & C. SpA, assembled a group of investors who want to merge Alitalia's flight business with domestic competitor Air One SpA to create an airline that controls more than half of the Italian market. Alitalia was losing $3 million a day when it declared insolvency on Aug. 29 to allow the state-backed rescue plan to begin.

Alitalia's bankruptcy administrator warned this week that the carrier didn't have enough cash to survive beyond this month. The airline, which flew 25 million travelers last year, risked becoming the first major European flagship carrier to collapse since Swissair Group and Belgium's Sabena in 2001.

Attendants Hold Out

There will be fewer job cuts for pilots than CAI had originally planned, said Massimo Notaro of the Unione Piloti association. The new proposal includes hiring about 140 part-time pilots and a separate contract for captains, the government said in a faxed statement.

Seven of nine Alitalia unions have now signed the agreement, with Sdl and Avia, representing most of the flight attendants, still considering the latest terms.

Prime Minister Silvio Berlusconi pledged during his election campaign in April to save Alitalia, which employs about 19,000 people. He said Sept. 18 that the carrier ``may be on the edge of the abyss'' after CAI halted negotiations when it failed to win over most of the unions.

CAI, whose investors include the Benetton family, revived its offer Sept. 25 with new concessions, such as more days off for pilots and cabin crews. Berlusconi's government also is trying to entice international airlines to join CAI, in part to help keep the unions in line.

``This agreement allows Berlusconi to fulfill his campaign promise and was possible after better conditions to pilots were offered,'' said Angelo Drusiani, who manages the equivalent of $1.9 billion of bonds at Banca Albertini Syz & C. in Milan, in a Bloomberg Television interview.

Big Names

Colaninno, former chairman of Telecom Italia SpA, has pledged along with at least 16 partners to invest about 1 billion euros ($1.46 billion) to buy Alitalia's commercial flight assets. The group includes Atlantia SpA, the toll-road company controlled by the Benetton family.

The partners intend to return Alitalia to operating profit in two years.

``It's a high-risk investment for the bidders,'' Drusiani said. ``Competition is so strong and they need a very robust industrial plan, boosting long-haul flights, if they want results.''

Fuel costs and slowing traffic growth are forcing many airlines to reduce capacity and slash jobs to bring down costs. The eight largest U.S. carriers plan to cut almost 26,000 workers starting this month as they park 465 airplanes.

Airline Failures

At least 24 airlines have filed for bankruptcy or ceased flying this year, the International Air Transportation Association said in June. Several more have folded since then, including Zoom Airlines, a trans-Atlantic carrier based in Ottawa and at London's Gatwick airport, which failed in August.

Alitalia administrator Augusto Fantozzi met Italian civil aviation authority Enac Sept. 25 and convinced the regulator to allow the carrier to continue to fly. CAI has extended its offer for Alitalia to Oct. 15, Fantozzi said, adding that the Italian airline will not ground additional flights.

Italy has been trying to sell Alitalia for more than two years. Union opposition scuppered an offer from Air France-KLM Group in April. Berlusconi also fought the Air France bid during his election campaign. Upon taking office in May he hired Intesa Sanpaolo SpA, the country's second-biggest bank, to design the rescue and find investors.

Competitor Interest

Air France, Deutsche Lufthansa AG and British Airways Plc have expressed interest in buying a stake in Alitalia, Fantozzi has said. Lufthansa has said it's monitoring the situation, and Berlusconi said last week that the German carrier would be the best partner for Alitalia. Lufthansa Chairman Wolfgang Mayrhuber was in Rome yesterday ``at the request of the Italian government,'' spokeswoman Claudia Lange said.

Lufthansa ``is interested'' in a stake in Alitalia, Luigi Angeletti, leader of the airline's third-biggest union, UIL, said after meeting the German ambassador in Rome yesterday.

Alitalia had originally been due to participate in the 2004 merger of Air France with KLM that formed Europe's biggest airline. Instead, Alitalia was excluded and told to improve its finances. It has lost almost 3 billion euros since then.

Alitalia shares were suspended in June after falling almost 45 percent since the start of the year, leaving the carrier with a market value of 617 million euros. It has one outstanding convertible bond and the government owns most of that debt. The Italian government has a 49.9 percent stake in Alitalia.

China Says Global Woes May Spill Over, Growth to Slow

The U.S. financial crisis will crimp consumption and spill over to the rest of the world including China, according to bankers and government officials meeting at the World Economic Forum in eastern China's Tianjin.

``We are in the worst crisis since the Great Depression,'' said Citigroup Inc.'s Senior Vice Chairman William Rhodes. ``We are in a period of a tremendous lack of confidence'' where financial institutions require fresh funds to restore consumer trust, he said.

U.S. Treasury Secretary Henry Paulson has proposed a record $700 billion rescue package for U.S. financial institutions and the Securities and Exchange Commission banned short selling of insurance, bank and brokerage stocks. The unprecedented bailout has raised concern in China, prompting officials including bank regulator Liu Mingkang to slow the introduction of new financial products such as derivatives and futures contracts.

China's annual economic growth may slow to between 9 percent and 9.5 percent, Liu said without specifying the period, as the U.S. financial crisis may crimp consumption, affecting global growth. China's 2007 economy expanded 11.9 percent.

``The most essential task now for Chinese companies is to survive, instead of thinking about overseas acquisitions,'' said Li Rongrong, director of the State-Owned Assets Supervision and Administration Commission, which holds the government's stakes in companies. ``The major difficulty faced by state companies is a significant decline in market demand.''

Opinions Divided

Bankers, corporate executives and officials gathering in Tianjin are almost equally divided on whether central banks should use taxpayers' money to bail out failed financial institutions. Chinese regulatory officials may collaborate with U.S. officials to contain the impact of the financial crisis, Rhodes said.

The People's Bank of China is ``working closely with the U.S. Federal Reserve on a series of measures that could be taken,'' Rhodes said, citing a telephone conversation with a senior member of the Fed. He didn't elaborate.

China's bank regulator is also in ``close consultation'' with the Fed, Rhodes said without giving details.

``All countries should take proactive measures to deal'' with the financial crisis, and prevent it from spreading, Chinese Premier Wen Jiabao said today in a televised speech at the World Economic Forum in eastern China's Tianjin. ``We should strengthen our cooperation,'' he said.

``When economic and financial crisis occur, economists and entrepreneurs, people and politicians, should be confident,'' Wen said. ``At the moment, confidence is more precious than gold'' and China's ``stable and sustained growth is our most important contribution to the world economy,'' he said

Bernanke Jumps Out of Political Fray After Warning of Collapse

Ben S. Bernanke jumped into the political fray this week when he urged quick action from Congress to deal with ``grave threats'' to the financial system. Now he's trying to jump back out.

The Federal Reserve chairman hasn't returned to Capitol Hill after two days of congressional testimony earlier this week. He has made it clear to Treasury officials and lawmakers that he isn't taking part in negotiating details of a $700 billion proposal to rescue the financial system even as the plan runs into a political buzzsaw.

By letting Treasury Secretary Henry Paulson be the point man with Congress, Bernanke may be trying to restore the Fed's position as a neutral party in Washington and preserve the central bank's independence. That's after he put both on the line by endorsing Paulson's plan and using the Fed's balance sheet to rescue creditors of Bear Stearns Cos. and American International Group Inc.

``There wasn't any alternative,'' said former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co. in Washington. ``The Fed and the Treasury had to get together. There could be no divisions.''

Now, Gramley says, Bernanke is ``just trying to maintain his neutral stance politically.''

While Bernanke has retreated from the limelight, he is talking to Paulson as many as a dozen times a day and taking calls from members of Congress.

Sticking to Principles

In his conversations with lawmakers, he is avoiding discussion of specific provisions of the Paulson plan and sticking to three principles: the plan has to be enticing enough to attract a large number of banks, it must protect taxpayers and it can't deliver windfalls to executives or institutions.

``I'm not empowered to negotiate for the Treasury,'' he told lawmakers at a Sept. 24 hearing.

Two days ago, Senate Majority Leader Harry Reid said Paulson and Bernanke were invited to discussions with lawmakers after talks broke down, causing some news organizations to report that both were headed over. In fact, only Paulson went to Capitol Hill.

Bernanke's stance is winning praise from both Democrats and Republicans, even though the plan he supports has drawn little but opposition from lawmakers' constituents.

``Bernanke's been a total straight shooter on this,'' Senator Sherrod Brown, an Ohio Democrat who sits on the Banking Committee, said in an interview at the Capitol. ``People trust him. He doesn't have the Wall Street bias that Paulson has. And he doesn't have the Bush administration coloring, if you will, that others have.''

`Stabilizing Force'

Senator Bob Corker, a Tennessee Republican on the Banking Committee, said the Fed chairman has been ``a very stabilizing force.''

``He's playing, I think, an appropriate role,'' Corker said in an interview. ``He's there on the other end of the phone in about five minutes.''

When the 54-year-old Fed chairman took office in 2006, he said he wouldn't get involved in such things as federal budget issues, breaking with his predecessor, Alan Greenspan. One of the responsibilities of the chairman is ``preserving the independence and non-partisan status'' of the Fed, Bernanke told the Banking Committee at the time.

``Bernanke, from the day he took office, decided that he wanted to stay out of issues that didn't involve monetary policy,'' said Gramley.

Bernanke Review

Even so, Bernanke is likely to review whatever final plan is presented to the White House, in part because the Fed Board regulates the holding companies of banks.

Bernanke and Paulson have worked closely together, having breakfast several times a month, including yesterday, since Paulson, the former Goldman Sachs Group Inc. chairman, joined the Bush administration in 2006.

Treasury signed off on the Fed's decision in March to lend $29 billion to secure Bear Stearns' sale to JPMorgan Chase & Co. and last week's $85 billion loan to AIG, which exposed taxpayers to risk. Those moves, along with the Fed and Treasury's decision to let Lehman Brothers Holdings Inc. file for bankruptcy, put the central bank in the position of picking winners and losers.

Asked if Bernanke should take a bigger role in the bailout talks, Reid said the Fed chief ``has been very helpful.''

Given Bernanke's background as a Great Depression scholar, the former Princeton University economist ``comes with a portfolio that is meaningful to these discussions,'' Reid told reporters in Washington yesterday. ``He's always been available whenever he's been asked to come.''

At the same time, Bernanke and Paulson are getting political lessons of their own, given the backlash over a plan that Americans see as aiding Wall Street and not Main Street.

``There's been some degree of amazement from the White House -- and certainly Secretary Paulson and Chairman Bernanke - - that people who run for elective office have constituencies that they have to take care of,'' Reid said.

JPMorgan Buys WaMu Bank Business as Thrift Seized

JPMorgan Chase & Co., the third- biggest U.S. bank by assets, agreed to acquire Washington Mutual Inc.'s deposits and branches for $1.9 billion after regulators seized the thrift in the biggest bank failure in U.S. history.

Customers withdrew $16.7 billion from WaMu accounts since Sept. 16, leaving the Seattle-based bank ``unsound,'' the Office of Thrift Supervision said today. WaMu's branches will open tomorrow and customers will have full access to all their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on a conference call.

WaMu's fate played out as Congress debated an accord to end the global credit crunch that drove Lehman Brothers Holdings Inc. and IndyMac Bancorp out of business and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos., which was itself absorbed by JPMorgan. WaMu in March rebuffed a takeover offer from JPMorgan Chief Executive Officer Jamie Dimon that WaMu valued at $4 a share.

``JPMorgan is getting a steal compared with what they were going to pay,'' said Scott Adams, a pension and investment analyst at the American Federation of State, County and Municipal Employees in Oakland, California, which owns WaMu shares. ``It's very tragic.''

CEO Deposed

WaMu collapsed as its credit rating was slashed to junk and its stock price tumbled. Facing $19 billion of losses on soured mortgage loans, the lender put itself up for sale last week after firing CEO Kerry Killinger this month. The bank named Alan Fishman as his replacement on Sept. 8, agreeing to pay him a $7.5 million signing bonus and $1 million salary.

In most bank seizures, little or nothing is left for shareholders. WaMu, down 95 percent in the past year, dropped to 45 cents in extended trading following the announcement, which came after the close of regular trading.

New York-based JPMorgan, which announced plans tonight to raise $8 billion by selling common stock, had its outlook lowered to negative by Moody's Investors Service. Moody's left its Aa2 rating on JPMorgan unchanged.

JPMorgan won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. JPMorgan paid $10 a share for Bear Stearns in March as the New York-based securities firm teetered on the brink of bankruptcy.

JPMorgan will add branches in California, Washington and Florida, among other states, and will have 5,400 offices with about $900 billion in deposits, the most of any U.S. bank. The branches and credit cards will carry the Chase brand and will be integrated by 2010, JPMorgan said.

The Right Price

``We got this at a price that protects us, where if we were wrong, it still protects us,'' Dimon, 52, said in an interview. The FDIC accepted JPMorgan's bid this morning, he said, and he already sent an e-mail to all of WaMu's employees.

JPMorgan had 75 people involved in the transaction and ``bid to win'' because it wanted WaMu's assets, Dimon said on an earlier conference call today. JPMorgan used its own investment bank to value the mortgages, he said.

``We don't know and we don't care'' about rival bids for WaMu, he said.

Dimon also said on the conference call that he's in favor of the government's proposed $700 billion plan to prop up the banking industry, but didn't rely on it to complete the deal.

Citigroup Inc., which had been among five potential acquirers, elected not to bid because presumed loan losses outweighed benefits from the deposits, said a person familiar with the situation. Wells Fargo & Co., Banco Santander SA and Toronto-Dominion bank had expressed interest in buying all or parts of WaMu, said a person with knowledge of the process.

Write-Offs

JPMorgan is taking on $176 billion in mortgage-related assets and writing down the value of it and other portfolios by about $31 billion, the company said. The bank will make a one- time payment of $1.9 billion to the FDIC as part of the deal.

JPMorgan expects its acquisition to add 50 cents per share to earnings in 2009, the company said in a statement today. JPMorgan said it will save $1.5 billion in pretax costs by 2010, offsetting the $1.5 billion it will take in merger-related charges. JPMorgan will close less than 10 percent of the combined retail shops.

WaMu had about 2,300 branches and $182 billion of customer deposits at the end of June. Its $310 billion of assets dwarf those of Continental Illinois Corp., previously the largest failed bank, which had $40 billion ($83 billion in 2008 dollars) when it was taken over in 1984.

Debtholders

WaMu has $28.4 billion in outstanding bonds, with Capital Research and Management the largest debtholder, Bloomberg data show. All three major credit agencies rate WaMu junk, the only company in the 24-member KBW Bank Index that's below investment grade.

JPMorgan rose $2.96, or 7.3 percent, to $43.46 earlier today in New York Stock Exchange composite trading before the deal was announced. It is little changed for the year.

WaMu lost $6.3 billion in the past three quarters. It kept skidding even after joining a list of financial companies the U.S. Securities and Exchange Commission protected from short selling in an effort to stabilize stock markets.

WaMu was the second-biggest provider of option ARMs, behind Wachovia Corp., with $54 billion held in its portfolio in the first quarter, according to Inside Mortgage Finance. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were subprime mortgages. WaMu, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest subprime lender in 2006, according to Inside Mortgage Finance.

Junk

WaMu estimated losses of as much as $19 billion in the next 2-1/2 years. Standard & Poor's cut the bank's credit rating twice in nine days, leaving it at CCC. Fitch Ratings and Moody's Investors Service cut WaMu to junk this month and have BBB- and Ba2 ratings, respectively.

``There were extreme liquidity pressures on this institution exacerbated by some ratings downgrades,'' FDIC's Bair said.

Killinger, WaMu's ousted CEO, joined Washington Mutual in 1982 when the company bought a securities firm. He was promoted to president in 1988 and CEO two years later, assuming control of a company with about $7 billion in assets.

Beginning in 1995, Killinger went on a shopping spree, making at least 14 acquisitions in the next seven years and boosting assets to more than $300 billion.

Between 1990 and the end of 2006, Washington Mutual shares jumped almost 20-fold, while the Standard & Poor's 500 Index quadrupled. Then the subprime rout started and defaults hit a record, as falling home prices and rising mortgage rates left borrowers with the weakest credit unable to repay their loans.

Financial bailout plan needs some oversight

We are involved in blood- and money-sucking wars in Iraq and Afghanistan, and now we have a Wall Street bailout?


We can't afford even one of the three adventures, much less all three at the same time.

Treasury Secretary Henry M. Paulson Jr., former CEO of Goldman Sachs, and Federal Reserve Chairman Ben S. Bernanke are part of the problem, not part of the solution.

Paulson called for a blank check for a risky and doubtful plan to stabilize Wall Street. It would seem Paulson, if given a free hand, might buy up subprime mortgages in default at full face value. Congress should put a cap of no more than 25 percent on these purchases. Let the people who created this mess feel some of the pain.

We would hope Congress keeps any administrators of a bailout plan on a short leash and demands full accountability. To hire the fox to guard the chicken coop is always a dangerous game.

A quake rocks Wall Street and the tremors ripple

Sean Grossberg closed the textbook for his financial derivatives class and sank into the couch. If all went according to plan, a year from now he'd be finished with school and working on Wall Street. But now he needed a break.

The University of Wisconsin senior hit the remote control and the second half of a Sunday afternoon football game filled the 100-inch screen.

Then his cell phone signaled a text message from a fellow finance major. The mess they'd been watching in the financial markets "has hit the fan," wrote his friend.

It was 6:29 p.m. Grossberg flipped open his laptop and pored over the news: Without the government to prop them up, one of Wall Street's most storied investment banks - Merrill Lynch - was surrendering. Another - Lehman Brothers - was hours from collapse.

"Indeed," Grossberg texted back.

By the time he headed for bed, after hours of scouring the Internet for more information, his mind was racing.

By then, a crowd blocked most of a sidewalk 900 miles away, outside a glass tower at Seventh Avenue and 49th Street in midtown Manhattan. Tourists in shorts and T-shirts jostled at police barricades, snapping pictures with their cell phones.

Employees of one of the nation's oldest and most prestigious financial firms lugged cardboard boxes stuffed with their belongings to the curb. Some wrapped each other in hugs. Others walked out with tears streaming down their faces. Atop one man's box a framed poster stuck out with a one-word headline: "Survivor."

"What's going on?" one man asked. The answer: This is the house of Lehman and it is about to fold.

"You've got to be kidding me. Lehman Brothers?"

Outside the Wall Street bubble, most people sidestep the usual thin stream of business headlines when a weekend is under way. For a day or two, we can do without the reminders that the economy is struggling. We feel it at the gas pump or the grocery store, see it in the paycheck, hear it in a friend's lament about a lost job. That's enough.

Besides, what are we supposed to make of all these reports about arcane securities backed by subprime mortgages. That's just a Wall Street problem, right?

Little did we know.

For the moment, though, on this Sunday night, the nation was just getting ready for bed, leaving behind a weekend of baseball pennant races and presidential politicking, of back-to-school shopping and barbecues. In a few hours, alarm clocks would wake people for their jobs on Main Street - and on Wall Street, like any other Monday.

But as people unfolded newspapers, logged on to computers, and began reconnecting with the world of overdue bills and to-do lists, a daunting new reality would become clear.

The fortresses of wealth and power where we invest our futures were swaying wildly.

The financial assumptions and assurances of yesterday had, seemingly within hours, turned queasily shaky.

It was already clear this would be no ordinary Monday.

And the stock market hadn't even opened yet.

---

MONDAY

At 8 a.m., dozens of Wall Street analysts dialed in to a conference call to hear the captains of Merrill Lynch and Bank of America lay out the terms of their deal.

"As you all know," BofA Chief Executive Ken Lewis told them, "the financial system is operating under almost unprecedented stress."

A few words later, the connection was cut off.

But the message was spreading, nonetheless:

-The sky was still dark when Dan Fagan, a financial adviser, began the 40-minute drive down the Wilbur Cross Parkway to his office at TIAA-CREF in New Haven, Conn. The overnight news about Merrill Lynch and Lehman Brothers - which had finally announced its bankruptcy filing in a 1 a.m. press release - poured from the radio.

At 6:15 a.m., Fagan's boss called.

"Can you believe it?" she asked.

They spent the rest of the drive talking about how to deal with what was sure to be a firestorm. By the time Fagan walked into the office he had 10 voicemail messages and 20 e-mails waiting from worried investors.

-In St. Louis, Paul Spector turned on "Today," and grimaced at the news from Wall Street.

"Here we go again," he thought.

He and his wife, Anna, owned Mezzanine, a women's clothing store. Over the last two months, the number of shoppers had dropped sharply. Between them, the couple was staffing every shift, replacing five part-time employees they'd let go. And Tuesday, Anna was leaving for New York, where she'd have to decide how much to buy for spring.

Now she had to wonder: Do we gird ourselves for a downturn? Or do we gamble on the future?

-In Sioux Falls, S.D., home builder Kyle Eberts pondered the news while he put in his paces on the treadmill. Eberts, a former stockbroker, had never forgotten about market psychology.

"I hope people don't panic," he told himself. If they did, what might that mean for sales of the $350,000 homes he was building? For now, the only thing to do was watch and wait.

When stock markets opened 90 minutes later, the Dow Jones Industrial average immediately fell by more than 200 points. By the time it closed, the market would drop 504 points, the biggest one-day point loss since the aftermath of Sept. 11, 2001.

Not everyone was a loser. Sitting in his room at Otterbein College in central Ohio, 19-year-old George Schubert stared at his computer screen. He'd scheduled his classes so he had plenty of time to watch the stock market. And in August, he'd put his amateur investing skills to work by placing a short position on American International Group - a bet that the stock of the world's largest insurance company would fall.

Now, like Lehman and Merrill, AIG - which insured the dubious investments that were pulling the big banks down - was also under attack. By day's end, its shares were down 61 percent. Schubert could barely contain his excitement - that is, as long as he could stay awake.

"I never drank so much Red Bull in my life," he said. He would cash in his AIG bet a day later, making a healthy (but undisclosed) profit as AIG fell from $70 last October to $3.

In his office in New Haven, meanwhile, Fagan was still at his desk.

The market had been closed for more than two hours. Investors were still calling.

---

TUESDAY

By Tuesday afternoon, it was clear to Rabbi Doug Sagal that, at least in his corner of the world, he needed to address the fallout from the financial world.

His congregation, Temple Emanu-El in Westfield, N.J., is filled with Wall Streeters. He sat down with his staff to plan a spiritual response. The result would be an e-mail to the entire congregation: Please, if you need someone to talk to, we're here.

"When I first became a rabbi, I served in a small town in Connecticut that was hit very hard by the closing of factories, homes being sold. Here I am, 20 years later, in a maybe more affluent community than I started in, with the same issues," Sagal said.

A similar meeting convened at St. Bartholomew's, the Episcopalian church in the heart of Wall Street. The staff crafted a special note for the upcoming bulletin.

"Trust and security used to be bywords in banks - along with those steel safes the size of chapels," it says. "Events in the markets this week, in our city particularly, have shattered a good deal of what was left of trust and security. Where, after all the changes and chances of this life, do you find security? What, or whom do you trust?"

At 6 p.m., on Capitol Hill, the nation's two most powerful financial officials - Treasury Secretary Henry Paulson and Ben Bernanke, the Federal Reserve chairman - called congressional leaders into a meeting. There is no choice, they said: The government must step in and take over AIG to keep the crisis from worsening. The meeting broke up a little less than an hour later and rumors of the plan sent the Dow up 142 points for the day.

But now there was something new to worry about.

In New York, The Reserve Fund - operator of a huge money market fund - announced it would be forced to do something unseen in more than a decade. Investors put their money in money markets specifically because they are so safe. You may not make much money, but you will not lose anything, or so goes conventional wisdom.

Reserve's Primary Fund, though, had so much invested in Lehman Brothers debt securities that every $1 share would now be worth just 97 cents.

The news broke as Richard Keeling, a research biologist, arrived home in University City, a suburb just outside St. Louis. Keeling had no money in The Reserve. But after watching the markets from the sidelines, his steadfast confidence is shaken for the first time. Keeling is 51 and his house is paid off, but the stock drop had already convinced him to shelve thoughts of an early retirement.

He logged on to his Vanguard account, and stared at the numbers: $10,000, parked in a money market account. What could go wrong?

Better not to wait for an answer.

With a few taps of the keyboard, Keeling moved the money out of the mutual fund and into his savings account. There, it would be safe. That, at least, he still believed.

---

WEDNESDAY

By Wednesday morning, the $85 billion bailout of AIG was all over front pages. But the news hardly calmed the market. It dropped almost 200 points to open and continued to lose ground.

On a Manhattan street corner, in the shadow of Macy's, a worker for the United Homeless Organization called out to pedestrians, trying to coax them into dropping money into the nearly empty plastic jug atop his card table.

"Billions for AIG!" he barks. "Come on. How about a dollar for the homeless?"

As the market tanked, it seemed to suck down all ships.

John Mack, chairman and CEO of beleaguered investment bank Morgan Stanley, tried to calm his capitalist army. "I know all of you are watching our stock price today, and so am I," he wrote, in a late-morning e-mail to all his employees. "What's happening out there? It's very clear to me - we're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down."

But Dan Fagan, the New Haven investment adviser, was on the front lines, and he knew that explanations and soothing words went just so far in the face of a growing panic. His phone rang and rang; these were wealthy folks, many of them quite savvy, but they were clearly rattled.

A 60-year-old client had been planning to retire this year. But his portfolio was down 25 percent; he was "terrified" that he was not going to be able to retire anytime soon.

Another investor e-mailed: "I'm afraid to look at my statements."

When a client who is a psychiatrist called, they discussed similarities between their jobs.

"We do therapy at times like this," Fagan says.

Across the country, Rich Kerr, manager of the Charles Schwab Inc. branch office in the Phoenix suburb of Chandler, Ariz., was similarly under siege.

Most investors just wanted to talk. But at lunchtime, a 54-year-old client arrived at the office. Usually quite calm, the man was clearly flustered. He told Kerr he wanted to take his entire $2 million in investments and move it into gold, which rose $70 an ounce on Wednesday - the largest one-day jump in history.

After an hour's conversation, Kerr convinced the man to let things be. But he understood: "There was a fear in his heart that everything was going to go into a total economic collapse."

On this day, that fear was truly understandable. The Dow closed down 450 points.

At 4 p.m., lawyers packed into room 601 at the U.S. Bankruptcy Court in lower Manhattan, where Judge James Peck presided over the dismantling of Lehman. Court workers set up chairs in the aisles, but the crowd poured out into the hall. A lawyer presented an offer by Barclays PLC to buy parts of Lehman for $1.75 billion; creditors had hoped to get more.

But opposing lawyers argued that the judge could not afford to wait. Lehman - once one of the major forces in the world of finance - now amounted to a melting ice cube, one said.

Uptown, Anna Spector wrestled with her decision: how much merchandise to order for her struggling clothing store back in St. Louis?

She noticed a change of attitude among the designers offering their wares. They were cutting their prices to give retailers a large profit. That, and the inspiring hustle of the hot-dog vendors outside the hall, convinced her she had to be bold. She called Paul and they decided to order enough clothes to anticipate an increase in sales.

She was still thinking about it as she flagged a taxi for the ride out to the airport that night. The driver tuned to an oldies station. At a song's end, the disc jockey jested.

"AIG no longer stands for All In Good fun," he said.

---

THURSDAY

By the time the 36 seniors in the economics class at Elk Grove High School took their seats, they had fresh material to discuss.

Teacher John Zehnder handed out copies of the Sacramento Bee. "New lows usher in new era," said the headline. He stepped to the dry-erase board at the front of room P-15 and writes "Federal Reserve" and "Ben Bernanke" in orange marker.

The government's decision to step in and save companies like AIG was nearly unprecedented, Zehnder explained. It was also nothing like textbook capitalism.

"In capitalism, we say 'Hey, if you're not strong enough to stay in business, you shouldn't be in business.' So what did the government say about AIG yesterday? Can we afford to let them fail?"

"No," students answered in chorus.

Other teachers also grasped that this was a historic week, filled with teachable moments. At the North Carolina School of Science and Mathematics in Durham, N.C., Jim Litle's students were too young to remember the savings and loan crisis of the 1980s. But they seemed to instinctively grasp the simple idea behind the Wall Street collapse: credit crunch.

"You people are all going to college," he told the class. But unless banks trusted each other and consumers, none of them would have the money on hand to lend them for tuition.

"Somehow we've got to create some way for people to trust each other. Trust is really hard in the financial world," Litle said.

Stocks fell through the morning. In Somerville, Mass., Richart Shortt watched with alarm. Shortt is 63 and semiretired, working as a business consultant. He had seen his stocks fall from $290,000 a year ago to $230,000 a week ago and now to $210,000.

Shortt had planned to quit working altogether over the next couple of years. Now, he told himself, he might have to put off retirement. But would he be able to find work in a down economy, as small businesses cut back on their own expenses?

So many questions, so few answers. When Fagan, the investment adviser, arrived at his New Haven office on Thursday, there were 20 voicemails from clients and 50 e-mails.

The most alarming call was from a 50-year-old client who moved his money out of stocks months ago and still felt insecure. He told Fagan he'd just come from the bank, where he had tried to withdraw his entire savings, but was told he could only withdraw $10,000 at a time. Now, he wanted to cash out of his brokerage account, too.

"Do you think this is the beginning of the end?" he asked Fagan.

Fagan reassured him that everything was fine, and that even having large amounts of cash on hand came with risks. The man decided not to put his money under a mattress.

By mid-afternoon, the market was down sharply.

But around 2 p.m., investors sent shares soaring on early reports of what could be a huge new gambit by the government - a massive buyup of the Wall's Street poisonous securities. Could this be the magic balm the market had been searching for?

By the time it closed, the Dow had gained 410 points.

"Bear markets are very sensitive to news," said Scott Fullman of WJB Capital Group in New York. "And on a scale of 1 to 10, this one is a 13."

---

FRIDAY

As soon as the opening bell sounded Friday morning, investors poured money into stocks, pushing the Dow up 450 points in less than half an hour. By day's end - after assurances from President Bush and his Treasury secretary - the Dow finished with a 370 point gain.

Which left it almost precisely where it was when the roller-coaster week began.

In her office in Bloomingdale, Ill., about 30 miles from Chicago, mortgage broker Jodi York-Caraballo took inventory. After the government had seized control of home finance giants Fannie Mae and Freddie Mac on Sept. 8, she'd sent out more than 200 e-mails to potential customers inviting them to take advantage of a resulting drop in interest rates. But with lenders seized by uncertainty, fewer than 10 had been able to qualify.

The announcement by the Federal Reserve and the recovery in the markets wouldn't solve that problem. But when three customers called her Friday morning asking for her assessment, York-Caraballo answered with measured optimism.

Don't expect rates to drop dramatically, she told them, but "as the dust settles, we should see an improvement."

Out beyond Wall Street, in the economy ordinary people call home, the recovery in the market left most doubts unresolved.

In St. Louis, the Spectors' clothing store was a "ghost town" on Friday, Anna said. Even a huge gain in stocks was not going to get people in a spending mood.

Her husband expressed dismay at the notion that the government might spend billions in taxpayer money to clean up banks' bad debt. In the shopping district near the couple's store, half a dozen businesses have closed recently. None of them were offered a government lifeline.

"It seems really, really hypocritical," he said. "Basically, all these companies that did wrong to get those people into bad mortgages - it's like they're just getting away with it."

A saner alternative

Now that all five big investment banks -- Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley -- have disappeared or morphed into regular banks, a question arises.

Is this bailout still necessary?

The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They're called "loans."

With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn't, the FDIC has the bridge bank facility to take care of that.

Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor.

The rest of Galbraith's plan is infrastructure renewable energy investment to help pull us out of the inevitable coming recession. All of this makes great sense.

Sure, it doesn't directly bail out irresponsible assholes on Wall Street, and there may be problems with this plan smarter people than me can identify, but it's clear that alternative solutions to a $700 billion giveaway are available and should be debated and considered.

The White House and/or Congress should release the full details of the Paulson presentation so that we (and smart economists) can get a true measure of the problem, and so that saner alternatives can be fully explored.

U.S. Stocks Gain on Speculation Bank Bailout Will Be Approved

U.S. stocks advanced, led by banks, on speculation Congress will reach an agreement on a $700 billion bailout of financial institutions, helping revive lending and credit markets.

Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. added as much as 6.6 percent on expectations policy makers will approve the plan, avoiding a ``long and painful recession'' President George W. Bush warned that would occur otherwise. Nike Inc. gained 8 percent as the world's largest athletic-shoe maker said earnings fell less than analysts estimated. Bed Bath & Beyond Inc. rose 5.3 percent after its forecast beat projections.

The Standard & Poor's 500 Index increased 20.74 points, or 1.8 percent, to 1,206.61 at 10:41 a.m. in New York. The Dow Jones Industrial Average climbed 200.48, or 1.9 percent, to 11,025.65. Seven stocks rose for every two that fell on the New York Stock Exchange, where trading volume was 34 percent less than at the same time a week earlier.

``There's more optimism about this plan getting through, and that's shining through into the market,'' said Daniel Bandi, who manages about $2.5 billion as chief investment officer of Integrity Asset Management LLC in Independence, Ohio.

The S&P 500 is down 19 percent this year on concern more than $500 billion in credit losses and writedowns at financial firms globally and a slowing economy are curbing profits. Speculation that lawmakers will derail the White House's plan to rescue banks pushed stocks lower yesterday. The benchmark index for U.S. equities has erased 70 percent of the gains it posted on Sept. 18 and 19 after the bailout plan was proposed.

`Basically Done'

Stocks rallied after representative Paul Kanjorski, a Pennsylvania Democrat, told CNBC that ``the package is basically done.'' Representative Spencer Bachus, the top Republican on the Financial Services Committee, said lawmakers were not close to a deal, as he entered a meeting to negotiate an accord.

``The market knows the deal's going to be done,'' said Peter Kenny, managing director in institutional sales at Knight Equity Markets LP in Jersey City, New Jersey. ``If the market suspected it was not going to pass, we'd be trading much lower.''

Bush's forecast for the economy and a warning yesterday from Bernanke that the U.S. faces ``grave threats'' increased chances of a Federal Reserve interest rate cut to 92 percent by the next meeting Oct. 29. Financial futures show traders expect the central bank to lower its benchmark rate to 1.75 percent in October and see 40 percent odds they will shift to 1.50 percent before the year is over.

Borrowing Costs Surge

Money-market interest rates around the world soared on mounting concern the U.S. Treasury's $700 billion bailout plan will be diluted as it makes its way through Congress, causing financial institutions to hoard cash. The three-month London interbank offered rate, or Libor, that banks charge each other for dollar loans jumped today by the most since 1999. The rate is set once a day.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened 0.14 percentage point to 3.16. That's the most since Bloomberg began compiling the data in 1984. It was 1.14 a month ago.

Bank of America Corp. rose 4.4 percent to $34.52. JPMorgan Chase added 6.6 percent to $43.17. Citigroup advanced 2.7 percent to $19.48.

Nike climbed $4.74 to $64.01. It said orders in China surged and reported first-quarter earnings that beat analysts' estimates after the Beijing Olympics boosted sales.

Profit Forecast

Bed Bath & Beyond, the largest U.S. home furnishings retailer, rose $1.63 to $32.34. The company said third-quarter earnings may be as much as 47 cents a share, 2 cents more than the average analyst forecast compiled by Bloomberg.

General Electric Co. retreated 1.7 percent to $24.18 percent after blaming ``unprecedented weakness'' in financial markets as the company reduced its profit forecast. The company cut its third-quarter profit forecast to between 43 cents and 48 cents a share, less than a previous forecast of 50 cents to 54 cents. GE also suspended its stock buyback.

``We thought GE would be a defensive holding,'' said Ralph Shive, chief investment officer at South Bend, Indiana-based 1st Source Corp. Investment Advisors, which manages $3 billion including GE shares. ``It's a disappointment.''

Stocks briefly pared their gain after the government said orders for U.S. durable goods fell more than twice as much as forecast in August, a sign that slower sales and tighter credit conditions prompted companies to cut spending. The 4.5 percent drop in bookings of goods meant to last several years followed a revised 0.8 percent gain in July that was smaller than previously reported. Excluding transportation equipment, orders decreased 3 percent, the biggest drop since January 2007.

Equities remained higher even after a separate government report showed sales of new homes fell more than expected in August to a 17-year low. The annual rate of new home sales tumbled 11.5 percent to 460,000, the fewest since January 1991, the Commerce Department said. The median estimate of economists polled by Bloomberg was 510,000.

Credit Derivatives Market Shrinks 12%, First Decline

Credit-default swap dealers reduced outstanding contracts for the first time amid efforts to cut risk by cleaning up the derivatives market.

The volume of trades in the worldwide market fell to $54.6 trillion from $62 trillion in the first half, the International Swaps and Derivatives Association said in a statement yesterday. It was the first decline since New York-based ISDA started surveying traders seven years ago.

Credit-default swaps grew 100-fold since 2001 as insurance companies, hedge funds and investors used the derivatives to protect against bond losses and speculate on companies' abilities to pay their debt. Traders are unwinding trades and protecting against losses after credit markets froze amid the worst U.S. housing crisis since the Great Depression. Regulators are starting to call for more oversight of the unregulated market following the bankruptcy last week of Lehman Brothers Holdings Inc.

``I would expect that if they were to re-poll next week, you would see an even smaller number from netting activities and trade cancellations surrounding the Lehman Brothers default,'' said Brian Yelvington, a strategist at CreditSights Inc. in New York.

ISDA's survey covered trading as of June 30. The so-called notional value in the report measures the gross U.S. dollar amount of debt protected, not the net risk from trades. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrower fail to adhere to its debt agreements.

U.S., Europe Bond Risk

Benchmark credit-default swap indexes fell today, a sign that investor perceptions of corporate credit risk improved. Contracts on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada fell 4 basis points to 165 basis points as of 9:22 a.m. in New York, according to broker Phoenix Partners Group. The Markit iTraxx Europe index of 125 companies with investment-grade ratings fell 0.5 basis point to 116, JPMorgan Chase & Co. prices show.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

After the collapse in March of Bear Stearns Cos., 17 banks that handle about 90 percent of trading in credit derivatives agreed to initiatives to curb market risks, at the behest of the Federal Reserve Bank of New York. The changes included tearing up trades that offset each other to help reduce day-to-day payments, bank staff paperwork and potential for error. The tear-ups may also reduce the amount of capital commercial banks are required to hold against the trades on their books.

Cutting Contracts

TriOptima AB, a Stockholm-based company formed to help banks cancel outstanding derivatives, said it cut $17.4 trillion in credit swap contracts during the first half.

Data provider Markit Group Ltd. and broker Creditex Group Inc., which were hired by dealers in July to complete the tear-up initiative in the Fed-instigated plan, said in August that 14 dealers reduced contracts submitted on North American telecommunications companies by 56 percent. During a second stage finished three weeks ago, 15 dealers cut contracts on European telecommunications companies by 53 percent, the companies said.

Declining open interest ``primarily reflects the industry's efforts to reduce risk by tearing up economically offsetting transactions and demonstrates the industry's ongoing commitment to reduce risk and enhance operational efficiency,'' ISDA Chief Executive Officer Robert Pickel said in the statement. ``We expect to see more effects of this over time.''

The initiative also comes as state and federal authorities seek regulations on the market for the first time since it was created a decade ago.

`No Rational Basis'

U.S. Securities and Exchange Commission Chairman Christopher Cox on Sept. 23 told the Senate Banking Committee that Congress should ``immediately'' grant authority to regulate the market amid concern that trading is fueling the financial crisis.

New York Governor David Paterson said in a statement on Sept. 22 that the state will start regulating some derivatives by deeming them insurance and requiring sellers to be licensed.

A widening in the difference between the cost of buying and selling protection on credits including Morgan Stanley last week had ``no rational basis,'' and helped drive down his firm's stock price, said CEO John Mack.

Other derivatives markets grew, ISDA said in its statement yesterday. The notional amount of derivatives used to hedge against changes in interest rates increased 22 percent during the first half of 2008 to $464.7 trillion. Contracts linked to equities grew by 19 percent to $11.9 trillion.

Bernanke Moves Closer to Rate Cut as Risks to Economy Intensify

Federal Reserve Chairman Ben S. Bernanke moved closer to cutting interest rates, signaling that risks to U.S. growth are greater than policy makers saw them just last week.

The ``intensification'' of the financial crisis in recent weeks is curbing Americans' access to borrowing, making the outlook for consumer spending ``sluggish at best,'' Bernanke told lawmakers in Washington yesterday. While he noted that risks to inflation remain, the Fed chief's testimony focused on ``grave threats'' to the banking system.

``It opens the door a bit further for rate cuts, although it doesn't signal that the committee is at that point already,'' said former Fed researcher Brian Sack, now senior economist at Macroeconomic Advisers LLC in Washington. ``It still seems like it would take a further deterioration in financial conditions or in the data to prompt a rate cut.''

Bernanke's assessment reflected further disruptions to money markets since the central bank met Sept. 16, when the Federal Open Market Committee left the benchmark rate at 2 percent. The three-month London interbank offered rate, or Libor, a benchmark for confidence in the banking system, jumped the most in eight years today.

Traders increased bets on a quarter-point rate cut at or before the FOMC's Oct. 28-29 meeting, sending the probability implied in futures contracts to 80 percent yesterday from 58 percent the previous day.

`Coming Back'

``Increasingly, the odds favor the Fed coming back and easing again,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. The FOMC cut rates seven times from September 2007 to April.

Still, interest-rate futures proved false in anticipating last month's decision, when the FOMC kept the main rate unchanged at 2 percent for a third meeting. Bernanke has shown a preference for separating monetary policy from efforts to increase liquidity and help financial markets function.

The Fed chief used his description of the dangers to the economy in trying to persuade lawmakers yesterday to support Treasury Secretary Henry Paulson's $700 billion plan for the government to remove devalued assets from the financial system.

Fed policy makers last week said tighter credit would ``weigh'' on growth, and consumer spending was ``softening.'' By contrast, Bernanke yesterday said that without congressional passage of Paulson's plan, the economy's performance may be damaged ``over perhaps a period of years.''

Growth Slows

Bernanke's testimony yesterday before the Joint Economic Committee signaled that restrictive credit has now slowed the economy from its 3.3 percent annualized pace in the second quarter to a pace ``appreciably below its potential rate.''

The Fed chief later joined Paulson for a House Financial Services Committee hearing yesterday to discuss the proposed financial rescue.

Fed officials have so far failed to stem the credit crisis even after the steepest rate cuts in two decades and interventions in Bear Stearns Cos. and American International Group Inc. this year. The Fed also backed the Treasury's action this month to take over Fannie Mae and Freddie Mac as the turmoil engulfed the two largest mortgage finance companies.

The central bank has also pumped billions of dollars into banks to try to restore liquidity, while invoking emergency powers to loan to securities firms. This week, the Fed expanded agreements with central banks abroad to offer dollars in overseas markets, providing up to $30 billion for Australia, Sweden, Norway and Denmark.

Fed Strategy

``We still think that they're going to leave the funds rate at 2 percent and try to address the specific market problems with liquidity provisions,'' said Stephen Stanley, chief economist at RBS Greenwich Capital Markets. The Fed will leave rate unchanged ``barring an absolute cataclysm in the economy and/or financial markets,'' said Stanley, a former economist at the Richmond Fed.

The crisis has intensified even with the Fed's cash injections, with banks hesitant to lend to each other on concern more institutions will fail.

Three-month Libor, a rate banks charge each other for loans in dollars, rose to 3.77 percent from 3.48 percent today, the biggest jump since 1999, British Bankers' Association data showed today.

Lawmakers at both hearings yesterday pressed Bernanke to explain better how the crisis would affect average Americans, such as constituents who were calling and writing to oppose what some termed a bailout for Wall Street.

In a worsening credit crisis, ``people cannot borrow to buy a car, to send a student to college, to buy a house,'' Bernanke told the House committee. Scant lending harms ``people at the lunch-bucket level,'' he said.

``Bernanke was refreshingly frank, open and honest about the economic outlook in a way that has been uncommon in his tenure,'' said Joseph Brusuelas, chief economist at fund manager Merk Investments LLC in Palo Alto, California.