The Worst Day in Dow History and the Law that Made It Possible

The Worst Day in Dow History and the Law that Made It Possible

On this day in economic and business history ...

There have been many "worst days ever" for the Dow Jones Industrial Average in more than a century of recorded history. However, one day may stand above the rest in its sheer scale for many years: Sept. 29, 2008, when the index lost 778 points and American markets as a whole suffered the first (and thus far the only) $1 trillion one-day loss ever recorded.

The stampede knocked over anyone unfortunate enough to be caught in its path, as investors reacted with panic to the House of Representatives' rejection of a $700 billion bank bailout plan, which would eventually pass several days later as the Troubled Asset Relief Plan, or TARP. Vikas Bajaj and Michael M. Grynbaum of The New York Times captured the shell-shocked aftermath:

What had started 24 hours earlier, with a modest sell-off in stock markets in Asia, had turned into Wall Street's blackest day since the 1987 crash. The broad market, as measured by the Standard & Poor's 500 stock index, plunged almost 9%, its third-biggest decline since World War II. The Dow Jones industrial average fell nearly 778 points, or 6.98%, to 10,365.45.

Across Wall Street, no one could quite believe what was happening on the floor -- the floor of the House of Representatives, not the New York Exchange.

As lawmakers began to vote on a $700 billion rescue for financial institutions, the Voyageur Asset Management trading desk in Chicago went silent. Money managers gaped at a television screen carrying news that seemed unthinkable: The bill was not going to pass. Shortly after 1:30 p.m., the rescue was rejected.

"You just felt like the world was unraveling," Ryan Larson, the firm's senior equity trader, said. "People started to sell, and they sold hard. It didn't matter what you had -- you sold."

Frustration, and then panic, coursed through the markets. Investors feared the decision in Washington would imperil the financial industry, as well as the broader economy.

Bank stocks took most of the hardest hits during the day's trading. Ohio-based bank National City lost 63% of its value by the closing bell, and Fifth Third Bancorp and Regions Financial both lost more than 40% on fears that their toxic-loan portfolios would drag them into bankruptcy before the federal government could ride to the rescue. National City collapsed a month later, and its assets were bought out by PNC Financial, but Fifth Third and Regions survived the financial crisis thanks to TARP infusions of $3.4 billion and 3.5 billion, respectively. Both have since paid off their bailouts with interest.

The lost bailout caused some investors to cry about the end of the world, but after some frenetic last-minute political arm-twisting and amending, the Emergency Economic Stabilization Act (with TARP included) was signed into law less than a week later. This sweeping bill contained far more than just TARP funding -- a later analysis estimated that the Federal Reserve had committed roughly $7.8 trillion to saving the financial system by the time the Dow bottomed out the following March.

Seeds of a crisis?
The repeal of Glass-Steagall is often identified as a major cause of the 2008 financial crisis, but a far better target for blame might be the Riegle-Neal Interstate Banking and Branching Efficiency Act, signed into law on Sept. 29, 1994. This act, meant to equalize the benefits of state and national banking charters, also wound up making national banking possible by allowing unrestricted branch expansion throughout the country regardless of any state laws to the contrary. For the first time since the Great Depression, the door was again open for American banks to grow as large as they wished and spread as far as possible. The largest banks of the day leapt at the opportunity.

The outcome of this law, particularly when examined against the additional megabank consolidation that took place during the financial crisis, is quite striking. At the end of 1994, the six largest banks in the United States controlled roughly $1.1 trillion in assets, equivalent to 15% of U.S. GDP. At the end of 2009, America's six largest banks controlled $9 trillion in assets, equal to about 62% of U.S. GDP. Bank of America , which had formed from the merger of the second- and fourth-largest banks of 1994 and was the largest bank by assets at the end of 2009, saw its total assets (including that held by both pre-merger parties) assets grow by 475% during these 15 years. JPMorgan Chase , formed by the consolidation of the third-, fifth-, and sixth-largest banks of 1994, had 360% more combined assets 15 years later. These banks had gone from being merely very big to being too big to fail, with terrible consequences for the American economy.

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