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The government announced the details of the $700 billion rescue package this morning. Specifically, $250 billion of the $700 billion plan will be used to buy equity stakes in banks, $125 billion of which will be used for the nine largest banks. Additionally, the government will guarantee new bank debt for three years and the FDIC will insure non-interest-bearing accounts, such as payroll accounts, similar to what Europe has already done.
These moves will improve liquidity, give banks the ability to lend again for business investment and for consumers, which will eventually drive growth again for our economy. This will take time to work through, but the government has taken decisive action and confidence will be restored. As a result, this morning LIBOR (bank lending rates) has already come down.
This is big news, and given the oversold market, we are likely to rally for a while. It will be interesting to see if the market retests the bottom it hit last week. While it is impossible to predict the exact bottom, it is certainly possible that we are at least somewhere in the neighborhood.