The expanded bailout of AIG wasn't greeted too enthusiastically on Wall Street. The stock market plunged sharply Monday — closing down below 7,000 for the first time in 12 years.
LINDA WERTHEIMER, host:
Wall Street saw the expanded bailout of AIG as bad news. The stock market plunged yesterday, closing below 7,000 for the first time in 12 years. Today, stocks are up a little in early trading. NPR's Chris Arnold has been following the financial crisis. Chris, good morning.
CHRIS ARNOLD: Good morning, Linda.
WERTHEIMER: You'd think the additional money for AIG would be good news. What's going on here?
ARNOLD: Yeah, you would think that. It is another bailout for Wall Street. But what's happening here is that, first of all, that's just one of the things that drove the market down. But, you know, it looks like the government is propping up AIG, and that could avoid a potentially messy collapse there.
But investors also see AIG as a barometer for a lot of other companies. I mean, it was this big financial octopus of an insurance company with its arms in lots of different things. And so the idea is, well, if losses are bigger than we thought at AIG, they might be bigger at lots of other kinds of companies.
And that really is feeding this sort of uncertainty and fear that's out there in the market right now, that at least some of the financial problems are getting worse, not better, despite all the government intervention.
WERTHEIMER: You said there were other things pushing the market down yesterday. What things?
ARNOLD: Well, a major European bank, HSBC, said it needed to raise a lot more money to cover losses. So, there's another big financial firm that's looks like it's sinking deeper into trouble. And there was just more economic data. Construction spending data came out, and that was down again. Single family homebuilding in the U.S. has fallen for 35 straight months now. It's been down, down, down. There are fewer commercial projects getting built now, too, and that's on top of lots of other data.
Rising unemployment is maybe one of the biggest and scariest numbers. I mean, we're losing close to 700,000 jobs a month right now.
WERTHEIMER: What about the government bailouts? Any data on that? Are they making a difference?
ARNOLD: Sure. You know, there's a lot of moving parts. But economists say some things would be a lot worse if the government wasn't intervening. And one easy thing to look at is mortgage rates. And here, you know, if you've got good credit and, say, your house is $300,000 and you want to refinance and you have some equity in it, you can go out and get a 5 percent, thereabouts, 30-year, fixed-rate loan. And that's very good, and a lot of people are saving money that way.
Those rates would be a lot higher if the government wasn't intervening. So, some things are getting better. But what's happening now is that the crisis is evolving into what economists call a vicious cycle.
WERTHEIMER: And so you have the sense then that problems are spreading and getting harder to control?
ARNOLD: Right. And that basically means that, you know, this started with subprime loans and big losses for banks. And, you know, that lead to a pullback in lending and that hurt all kinds of different companies. And we've had layoffs. And now those layoffs mean less spending by consumers, people get nervous, consumer confidence falls. And that hurts more businesses. It means more layoffs.
And this cycle now is just really ripping the economy apart. And here, you know, there are some economists who say they're just really shocked by how quickly economies all over the world are slowing down. And one person I talked to said, you know, he's just never seen anything - he's an analysts, and he's never seen anything like this in his adult lifetime. And it's just very difficult to figure out where the bottom is.
WERTHEIMER: Very quickly, Chris: Lots of people are thinking maybe they should just get out of the stock market.
ARNOLD: Well, yeah, that's the sort of the human instinct to cut and run and stop the bleeding. But, you know, a lot of really well-respected financial experts say you've got to stay in this market. It's already fallen 50 percent. You know, the horse has left the barn. You know, selling stocks now, odds are you're just selling low and you're going to miss the rebound.
WERTHEIMER: NPR's Chris Arnold on yesterday's market plunge. Today in early trading, the Dow Jones Industrial Average is up a little.
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The Dow Jones industrial average fell below 7000 Monday, its lowest level in more than a decade, after world stocks took a dive and troubled insurance giant AIG posted the largest quarterly loss of any company in U.S. history.
American International Group lost $61.7 billion in the last three months of 2008 despite U.S. government efforts to prop up the ailing firm, the world's largest insurer.
The Treasury Department said Monday it would extend an additional $30 billion on an "as needed" basis to AIG after the Bush administration gave it $150 billion in taxpayer aid last year.
U.S. consumers, meanwhile, unexpectedly bought more in January after curbing their spending habits for six straight months amid the deepening recession. The increase, however, was expected to be temporary. Incomes were also up the most since May, thanks largely to pay raises for the military and civilian government employees.
The Dow's latest slide came on the heels of a 4 percent or larger drop in the European benchmark indexes. At 3 p.m. ET, the Dow continued to tumble, falling below 6800.
AIG's chairman and CEO, Edward Liddy, sought Monday to reassure Americans that his firm would not draw on the new $30 billion unless absolutely necessary. Despite the assurances, the government has warned that more bailout money could be needed.
Speaking to NBC's Today program, Liddy said: "We're going to be able to pay back the Federal Reserve. The new $30 billion is a standby line. It's not necessarily something that we think we'll have to draw on right away."
Treasury's latest effort is being described as an effort to stabilize the company and the financial system.
The government's action forestalls a likely downgrade in AIG's credit rating, which could have pushed the company into bankruptcy. Given AIG's numerous insurance customers and its ties to major financial institutions, the government said the potential cost of inaction, both to the economy and to the taxpayers, would have been extremely high.
"Today's actions were critical," he told reporters, adding that the "the risk of doing nothing was unacceptable."
Under the new package, instead of paying back $38 billion in cash with interest that AIG has used from a Federal Reserve credit line, the company will now repay that amount with equity stakes in Asia-based American International Assurance Co. and American Life Insurance Co., which operates in 50 countries.
Monday's announcement marked the fourth time the government has stepped in to help AIG since its initial lifeline was extended in September.
There was more bad economic news. Construction spending fell by 3.3 percent in January, the Commerce Department reported. That is more than twice as much as the 1.5 percent drop Wall Street economists surveyed by Thomson Reuters had been expecting.
Nonresidential construction fell by 4.3 percent, the biggest drop since January 1994, the department reported. Residential construction fell 2.9 percent.
Also Monday, the Commerce Department said that Americans spent 0.6 percent more in January, even better than the 0.4 percent gain that economists expected, while the personal savings rate surged to 5 percent — the highest level since 1995 — as wary consumers continued to save their cash.
Consumer spending accounts for about 70 percent of total economic activity. The January increase was driven by a sharp 1.3 percent rise in purchases of nondurable goods, led by much higher spending on food.
But analysts do not expect the trend to continue. Last week, the government reported that the overall economy, as measured by the gross domestic product, shrank at an annual rate of 6.2 percent in the final three months of 2008. That was the sharpest fall in about 26 years.
Also Monday, the private Institute for Supply Management's index of national factory activity inched up to 35.8 in February from 35.6 the previous month. Manufacturers said the modest improvement in the headline index was likely due to the resumption of production at some auto plants after long holiday closures.