Fed Intervention Alleviates Stock Market Panic

By Anastacia Mott Austin

United States Treasury Secretary Henry Paulson announced this week plans for the federal government to save flailing banks, easing market investor panic that rose dramatically earlier this week.

Paulson did not give specifics of the plan, but said he would make a more detailed announcement early next week. But a few measures began to take effect immediately.

The Federal Reserve Bank said it would buy out short-term debts from the two major mortgage companies Fannie Mae and Freddie Mac, as well as Federal Home Loan banks, and extend its emergency lending program.

A ban on a practice known as "short selling" also took effect and helped stabilize the market. Short selling occurs when sellers borrow shares and bet against them, hoping the stock price will fall, which can affect investor confidence and create a vicious cycle.

In addition, major world banks joined forces to pour $180 billion into global money markets this week in an effort to stabilize the credit crisis.

The moves top one of the rockiest weeks in the market in recent history, with a massive downfall on Monday, followed by an upsurge Tuesday, another fall on Wednesday, and a rally Thursday.

The Feds' announcement of a rescue plan injected a note of confidence back into the market, and shares rose again, perhaps temporarily. "If a solid plan is put in place, it's definitely going to be a positive in easing the pain," said Stephen Carl, an equity trader at The Williams Capital Group, to Associated Press reporters. Added Carl, "It depends on how it's structured."

At the end of this week, the major stock indexes stood at a level above where they began at the start of this tumultuous week, signaling relief among traders.

"Just like a child wishing for a Wii or an Xbox on Christmas Day, the market was hoping for some sort of RTC [Resolution Trust Corp] type of arrangement, and there it was underneath the Christmas tree," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank, to reporters.

Added Fitzpatrick, "It was the booster shot that the market was looking for. This was what we needed to happen, to remove those assets dwindling on balance sheets. And the short-sale rule, for the sector that it's targeting, will also help near term."