Another Black Monday for Wall Street

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The VIX equity volatility index surged above 47 as the bailout vote failed and stocks nose-dived. That puts the market's favored "fear gauge" through the 42.16 six-year high hit recently, notes Action Economics. It would take a move to 50-60 to reach areas previously struck at the times of inflection/capitulation points on stocks, with the next upside benchmark the 110 area struck on Black Monday in 1987.

PIMCO fund manager Bill Gross predicted a "freeze of significant proportions" in the credit markets if the rescue plan is truly dead -- "even more frozen than before" in a CNBC interview. As a next step for authorities, he sees the possibility that coordinated interest rate cuts are undertaken by global central banks if the credit markets seize up further and stocks plunge.

Markets around the world were also disturbed by more turmoil among financial institutions as the credit crisis goes global, with indexes in London and Paris dropping over 5% Monday. Among the developments: news that Wachovia's (WB) banking assets were to be acquired by Citigroup (WB) and that the Justice Dept. and Securities and Exchange Commission subpoenaed mortgage giant Freddie Mac's (FRE) records. News that two European banks were being nationalized suggested that the industry's problems were global in nature.

Monday brought word of another shotgun marriage for a troubled financial firm. Wachovia plans to sell its retail bank, corporate and investment bank and wealth management businesses to Citigroup (C). Wachovia will remain a public company with two main operating subsidiaries: Wachovia Securities, the nation's third largest brokerage firm, and Evergreen Asset Management, a leading provider of asset management services. Citi will pay $2.1 billion to Wachovia and assume the company's senior and subordinated debt. The FDIC would backstop any losses beyond $42 billion on Wachovia's $312 billion pool of loans.

In economic news Monday, U.S. personal income rose 0.5% in August, and above the 0.2% markets had expected. However, spending was flat and below the 0.2% increase. Moreover, July and June spending readings were also revised down. Disposable income fell 0.9%, a third consecutive monthly decline. The savings rate slowed to 1.0%. The core PCE deflator accelerated to a 2.6% rate compared to 2.5% in July (revised from 2.4%).

"Consumption spending shows a significantly weaker trend after this morning's personal income report," wrote Morgan Stanley economist David Greenlaw in a note Monday.

"The income data are a little better than expected, while the deflator numbers were a little worse. However, markets today will likely focus on the credit markets and the Congressional vote on the rescue package," wrote S&P senior economist Beth Ann Bovino Monday.

Fed funds futures were mixed in early trading Monday as traders bet on the merits of the Treasury bailout package, and weigh the likelihood of its success in rescuing the financial markets and salvaging economic growth, according to an Action Economics report. The market is fully priced for a 25 basis point rate cut at next month's Fed policy meeting, says Action, with some modest risk for a 50 basis point easing, even though the Fed has indicated over the past several months it prefers to hold the line on the target Fed funds rate at 2%.

"We still believe the Fed will hold its powder dry unless data show the economy is taking a severe hit from the credit stresses," according to Action Economics analysts.

There were also some worrisome new credit-crisis developments out of Europe on Monday.

The deepening of the financial turmoil has led to sharp rise in interbank rates and the ECB allotted €120 billion in a special 38 day tender, that will be extended into next year. Meanwhile European central banks have announced that they will double their USD swap facilities in another co-ordinated move to deal with the troubles in the financial sector.

Belgian, Dutch, and Luxembourg governments agreed to inject €11.2 billion (US$16.4 billion) into Fortis, and U.K. mortgage lender Bradford & Bingley became the second British bank to be taken under the government's wing since the crisis began last year. Fortis is the first major euro zone bank to buckle under the financial turmoil triggered in August last year by U.S. mortgage defaults.

Meanwhile, Germany's Hypo Real Estate secured credit guarantees of €35 billion, the bulk of which will be provided by the German government.

European stock markets plunged Monday. In London, the FTSE 100 index fell 5.3% to 4,818.77. In Paris, the CAC 40 index declined 5.04% to 3,953.48. Germany's DAX index shed 4.23% to 5,807.08.

Asian markets also felt the heat Monday. Japan's Nikkei 225 index fell 1.26% to 11,743.61. In Hong Kong, the Hang Seng index dropped 3.26% to 17,880.68.

The dollar index was higher at 77.59.

December gold futures were up $25.60 to $914.10 per ounce in volatile trading Monday afternoon. Investors were seeking the haven of gold in a flight to safety from worries the current financial crisis in the U.S. and Europe will result in a global recession. While a recession would reduce demand for commodities, some view gold as an alternative and safer investment. Regardless, the liquidity and negative sentiment in the banking sector will not go away soon and will have to be dealt with by the next administration.

November West Texas Intermediate crude oil futures tumbled $10.48 to $96.41 per barrel Monday afternoon after the House defeated the financial rescue plan.

Andrews is managing editor of the Investing Channel for BusinessWeek.com . McCormack is senior producer for BusinessWeek.com's Investing channel .