All of this occurred only two weeks after the massive federal rescue of Fannie Mae and Freddie Mac and three months after the collapse of Bear Stearns. Market participants around the world have been shocked senseless by these serial failures. Their confidence has evaporated, replaced by an unprecedented level of fear. That is why lending is frozen and worldwide markets are plunging.
Now, everyone has the same question: how much worse can this get? This lack of confidence is self-fulfilling and endangers other financial institutions. These are companies that refinance themselves in the capital markets every day. They depend on the confidence of lenders. But, if that disappears, their solvency is threatened. This is where we are now.
This has put the Fed and the US Treasury into a nearly impossible position. At one level, the Fed's core mission is to protect the stability of our financial system. It engineered the rescue of Bear Stearns and extended emergency credit to Fannie Mae and Freddie Mac because it judged that the systems might not withstand their collapse. It has legal authority to provide unlimited assistance to others.