NEW YORK - The Federal Reserve swept into the market this past week to offer a calming hand, but that's still no panacea for the fundamental problems Wall Street faces.
Big institutional investors from hedge funds to investment banks are still wrestling with credit problems spawned by distressed subprime mortgage loans.
The housing market still looks gloomy. And the wave of takeovers that drove stocks to new highs this year has dropped off considerably.
The Fed's discount rate cut and injection of billions of dollars into the banking system alleviate only some of the stress. Wall Street observers say there is still plenty of risk out there and that the aftershocks from the failure of billions of dollars in subprime loans have yet to be felt.
"What the Fed did was about consistent with putting a Band-Aid on a gunshot wound," said Chris Johnson, founder of Cincinnati-based Johnson Research Group. "You have a situation where the subprime concerns have spread, and there are still a lot of things going on in this market that are just wrong."
Investors are really hankering for a more important interest rate cut - in the federal funds rate - when policymakers meet next month. That would lower borrowing costs on everything from school loans to mortgages, and also help stimulate the economy. But there's a catch even with a fed funds cut - it would would take months for the benefits to be felt.
Investors must also take into account that it's the dead of August - not exactly a time of the year known for big market comebacks. Its one of the worst kept secrets on Wall Street that August through October is a rough period for stocks, and one better known for corrections and crashes.
Moreover, reverberations from the subprime mortgage crisis are expected to be felt in the months ahead. There are some that argue the problem has hurt financial markets much more than was warranted, but the fact remains that the nation's financial institutions have been hurting because of it.
"There are still so many unknowns out there," said Greg Gilbert, president of Oakland, Calif.-based Infinity Financial Services. "There's a lot of ugly loans out there. You're not going to see JPMorgan or Citigroup go bust over this, but they are going to take an earnings hit."
Lenders in trouble
Banks and mortgage lenders that have been hit directly from their exposure to subprime loans include Washington Mutual Inc. and Countrywide Financial Corp. Bigger institutions, like Goldman Sachs Group Inc. and Bear Stearns Cos., have been pinched by the market volatility that ensued.
On Wednesday, Countrywide said it borrowed $11.5 billion from a group of 40 banks to help stem losses and stay afloat. The nation's largest mortgage lender had previously raised money by issuing bonds and other debt backed by the mortgages it sells - but a global flight to safety has all but dried those markets up. The company's set off another wave of heavy selling on Wall Street.
And the pain for lenders like Countrywide isn't expected to go away anytime soon. Over the next year and a half, monthly payments on some $600 billion of subprime mortgages are scheduled to rise sharply as their two-year loans reset. This could trigger foreclosures for already strapped borrowers, and in turn flood the real estate market with even more vacant homes.
This past week also saw Goldman Sachs tell investors that three hedge funds it manages were socked by market volatility, and required a $3 billion infusion of cash. Meanwhile, Sentinel Management Group, a $1.5 billion cash-management firm, said it halted redemptions from investors wanting to exit one of its funds.
The Fed's moves were designed to make it easier for these financial institutions to operate. In fact, even if credit and debt worries deepen, global banks will likely come out ahead by snapping up distressed debt at bargain prices.
"I've always said this, the big dogs get to eat first," Gilbert said. "But, for the rest of us, the problems are still out there."