CBS NEWSAP - A late afternoon barrage of selling sent the Dow Jones industrials tumbling more than 500 points as weak corporate earnings stoked fears that the government's financial intervention won't keep global economies out of recession.
Poor earnings from large companies in disparate sectors Wachovia Corp., Boeing and Merck & Co. - illustrated how wide the downturn had spread. One bright spot was McDonald's Corp., where third-quarter profits rose thanks to the strength of its low-priced meals.
Even with the aggressive steps the government has already taken, Treasury Secretary Henry Paulson told interviewer Charlie Rose Tuesday, "Clearly, we're going to have a number of difficult months ahead of us in terms of the real economy."
Most major indexes fell 6 percent or more. The Dow lost 7.1 percent. Oil prices hit lows last seen in June 2007, trading below $67 a barrel on worries about weakening demand.
Asian markets veered sharply lower Wednesday, with Tokyo's Nikkei index tumbling 6.79 percent. Hong Kong's Hang Seng was down 6.2 percent, while South Korea's main index shed 5.1 percent.
The major European indexes - Britain's FTSE 100, Germany's DAX and the CAC-40 in France - all slipped about 4 percent.
In South America, Brazil's Bovespa dropped more than 10 percent and Argentina's Merval index dropped more than 16 percent, after falling 11 percent Tuesday. Argentina's president announced plans to nationalize private pension funds to protect retirees from the global financial crisis.
World leaders will gather in Washington on Nov. 15 to discuss the meltdown. A senior administration official said Wednesday that the forum will be the first in a series of international meetings to discuss what economists predict could be a long and deep downturn.
For many U.S. companies, the damage has already begun.
Wachovia, which is being bought by Wells Fargo for about $14 billion in stock, said it lost $23.89 billion in the third quarter, down from earnings of $1.62 billion in the same quarter a year ago. Airplane maker Boeing reported its earnings slumped 38 percent as a strike halted production of commercial jets.
Merck & Co. said it will slash 7,200 jobs as part of a new restructuring program. The drugmaker's third-quarter profit plunged 28 percent, partly due to flat sales. Earnings also fell at paper company Kimberly-Clark Corp., insurer WellPoint Inc. and drug developer Wyeth.
"We are going into what is very clearly a recession mode," Blake Jorgensen, Yahoo's chief financial officer, said in a Tuesday interview. Yahoo is slashing 1,500 jobs while it braces for a deep downturn likely to extend well into 2009.
"Right now we have nine million Americans out of work, that's up from six million this time last year, and to every trader on the floor, to every trader upstairs, that's the most important number" because consumer spending makes up two-thirds of the economy, said Alan Valdes, vice president of trading firm Hillard and Lyons.
The official arbiter of recessions, the nonpartisan National Bureau of Economic Research, has not called the current downturn a recession.
Third-quarter profits at budget-friendly McDonald's rose 11 percent. Same-store sales, or sales at stores open at least a year, were notably strong in the third quarter, rising 7.1 percent globally and 4.7 percent in the U.S.
McDonald's is "recession-resistant," Chief Executive Jim Skinner said on a conference call, adding that it is "operating from a position of strength."
A week after Paulson announced the administration would spend $250 billion to buy stakes in U.S. banks, the Federal Reserve stepped up Tuesday with a new program to help money market mutual funds that have been squeezed by worried investors demanding to cash out their holdings.
The Fed said it would provide up to $540 billion in financing though a program run by JPMorgan Chase & Co. to purchase from mutual funds certificates of deposit, bank notes and commercial paper. The program, to be called the Money Market Investor Funding Facility, is designed to revive the market for commercial paper, short-term loans that are critical for keeping businesses running.
Money market funds hold about one-third of all commercial paper and Fed officials said that about $500 billion had flowed out of prime money market funds since August as investors became increasingly worried about their ability to redeem shares. On Sept. 18, the Treasury Department announced that it was tapping a $50 billion Treasury fund to provide guarantees for the assets in the money market accounts.
The Fed announced Wednesday it will boost the interest rate paid to commercial banks on excess reserves.
Paulson said in his television interview that banks might use part of the money they receive from the government to make acquisitions of weaker banks.
Credit markets are showing some signs of a thaw. Yields on Treasury bills and the interest rates banks charge each other have both fallen back to late-September levels. Bank-to-bank lending rates fell sharply overnight. The London Interbank Offered Rate, or Libor, on three-month loans in dollars fell to 3.54 percent from 3.83 percent, dropping for an eighth straight day. Libor is important because many mortgage and credit card rates are pegged to it and it's a good barometer of banks' willingness to lend.
Despite declining rates, the volume of loans remained weak.
"We're making slow progress and confidence is returning but we're still not there yet," said Christopher Cordaro, chief investment officer at RegentAtlantic Capital LLC in Chatham, N.J.
Meanwhile, members of Congress are moving forward with efforts to overhaul the regulatory system. The changes could be the most sweeping since the 1930s, when Congress revamped how the financial system was regulated in response to the 1929 stock market crash and a wave of bank failures.
Democrats in Congress are also pushing efforts to assemble a second economic stimulus program that could total $150 billion or more. On Monday, Fed Chairman Ben Bernanke said a "significant" stimulus package is appropriate. The White House has yet to endorse the idea, but has said President Bush was at least willing to consider a second stimulus measure.