Wall Street’s Pay Is Expected to Plummet

New York Times
November 6, 2008

By BEN WHITE

The first clues are emerging that Wall Street pay will plummet this year — but perhaps not enough to satisfy the financial industry’s critics.

Bonuses, which soared to record heights in recent years, could drop by 20 to 35 percent across the industry, according to a private study to be released on Thursday. Bonuses for top executives could plunge by 70 percent.

But to some, those figures, from the consulting firm Johnson Associates, demand the question: Why should Wall Street executives get any bonuses at all? Banks’ profits have plunged, and the government is spending hundreds of billions of dollars to shore up the industry and prevent its problems from dragging down the economy.

A report on Wednesday from the New York State Assembly said Wall Street bonuses could tumble 41.3 percent next year, which could further widen a budget deficit.

The annual Johnson study, a closely watched analysis based on a survey of banks and money management firms, as well as on compensation figures disclosed in corporate filings, arrives as the industry is under growing political pressure to hold down pay.

Nine of the nation’s biggest banks began handing over data on Wednesday to Attorney General Andrew M. Cuomo of New York on how much they plan to pay in bonuses this year, as well as how much they paid in 2006 and 2007. Several of the banks have asked Mr. Cuomo for more time to provide the figures.

In an interview on Wednesday, Mr. Cuomo suggested that even 70 percent declines for top executives might not be enough, given a financial blowup that culminated in a $700 billion federal rescue for the industry. Many critics, Mr. Cuomo among them, contend that outsize pay encouraged bankers to take outsize risks in the first place. The crisis that followed led to the bankruptcy of Lehman Brothers, the emergency sales of Bear Stearns and Washington Mutual and federal rescues for the insurance giant American International Group and the mortgage companies Fannie Mae and Freddie Mac.

“Given this economic situation, how do you justify any performance bonus at all, is my initial point,” Mr. Cuomo said.

Bankers and traders have been rewarded for taking risks that Wall Street clearly failed to manage. “When you incentivize that type of behavior, you shouldn’t be surprised when you find very risky, overly creative, short-term, highly leveraged products,” he said.

Mr. Cuomo added that he would closely examine the books of the nation’s biggest banks to ensure that no government money went into bonus pools. Henry A. Waxman, the California Democrat who heads the House Committee on Oversight and Government Reform, has asked for similar pay information from banks.

Wall Street executives, even at banks like Goldman Sachs and Morgan Stanley, which produced decent profits this year, are increasingly aware that large bonuses could set off an enormous public reaction.

Many executives and top bankers and traders gorged on huge bonuses during the boom years earlier this decade, in many cases on profits that later disappeared as the subprime mortgage meltdown bloomed into a crisis. Last year, financial groups paid out about $33.2 billion in bonuses, according to the New York State Comptroller.

For instance, Richard S. Fuld, chief executive of Lehman Brothers, received about $34.4 million last year, though much of that was in stock that later became worthless. Mr. Fuld will leave as chief executive at the end of the year, with no bonus or severance payments, the firm said.

Lloyd Blankfein, Goldman Sachs’s chief, received a package worth $68.5 million last year.

Nothing like that is expected this year, given the industrywide plunge in profits.

According to Johnson Associates, top executives are expected to be hardest hit, partly because their payouts are disclosed in corporate filings and executives want to avoid a public outcry.

Alan Johnson, managing director of Johnson Associates, said chief executives at banks were likely to get the bulk of any bonus in stock, a method that would probably trickle down.

“Whatever you get paid is likely to be in paper,” Mr. Johnson said. “There is not going to be much cash.”

That is not likely to please bank employees, who have watched their companies’ shares plunge.

Among different areas of banking, the study suggests that fixed-income traders will see bonuses decline 40 to 45 percent.

Investment banks typically pay out about 50 percent of revenue as compensation, and year-end bonuses can account for a large percentage of employees’ pay. In the past, fat bonuses led to big spending on lavish apartments and other luxuries, and leaner times are expected to hurt New York’s economy.

In previous lean years, Wall Street banks justified large payouts by arguing that top employees would flee for higher-paying jobs. But with tens of thousands of Wall Street jobs disappearing, that argument may no longer hold. “Where are people going to go?” one senior banking executive asked.

Bleak Reports Keep Markets in Free Fall

New York Times
November 7, 2008

By MICHAEL M. GRYNBAUM

The political world shifted on Tuesday, but the change did little to ease the anxiety on Wall Street.

Despite stabilization in the credit markets and lower interest rates around the globe, the last two days were the worst in the American stock market since 1987. In 48 hours, the Dow Jones industrial average dropped nearly 1,000 points, and the Standard & Poor’s 500-stock index, a broader measure of stocks, lost nearly 10 percent of its value.

“Normally markets are driven by fear and greed,” said Brian Gendreau, a strategist at ING Investment Management in New York. “Now it’s fear and fear.”

There were no clear catalysts that spurred the sell-off — which dragged the Dow lower on Thursday by 443.48 points — beyond the regular drumbeat of poor earnings from the corporate sector and bleak data on the economy. Those reports have been arriving almost daily for the last few weeks, signs of a recession that many fear will be darker than anyone imagined just a year ago.

But the mantra on Wall Street was that the pain was being “priced in” — that is, investors had sold stocks in anticipation of weaker earnings and stingier spending. The cataclysmic losses of October, the worst month on Wall Street since 1987, were supposed to reflect the defensive moves of an investor class buckling down for the pain to come. With that out of the way, it was time for the market to stabilize.

Instead, investors appear to be betting that the worst is yet to come. Stocks that rallied after hitting a year-to-date low on Oct. 27 are heading south again, veering toward a new bottom. The trends suggest that investors remain remarkably skittish. Shares of banks fell on Thursday by 7 to 10 percent, single-day swings that would have been unthinkable a short time ago. These days, fleeting headlines can move the market just as much as interest rate cuts and major economic data.

On Thursday, the bad news came in the form of slumping sales at the nation’s retailers, a harbinger of a holiday shopping season that could be the worst in years, according to industry analysts.

Not helping matters: a bleak forecast from Cisco Systems, the networking giant, and comments from an executive at General Motors that suggested the company was struggling to survive.

Investors may also have been selling ahead of Friday’s report on the job market, which economists say will be grim. The Labor Department is expected to report that employers cut hundreds of thousands more jobs in October, bringing the simmering problems in the labor market to a full boil.

The Dow Jones industrial average closed at 8,695.79, down 4.9 percent, its lowest finish since Oct. 28, after swinging in a 518-point range. The S.& P. lost 47.89 points, or 5 percent, to 904.88, and the Nasdaq composite index fell 72.94 points, or 4.3 percent, to 1,608.70.

“The market already knows the economy is pretty sick,” Meg Browne, a currency strategist at Brown Brothers Harriman, said. “But there is attention being paid to tomorrow’s jobs numbers. We think they’ll be much worse than the market forecast.”

The declines on Wall Street came despite sharp reductions in foreign interest rates by central banks seeking to further ease the tight credit markets. The Bank of England lowered its benchmark rate by 1.5 percentage points, more than analysts had expected, and the European Central Bank cut rates by half a percentage point.

Credit markets also showed some improvements. The amount of outstanding commercial paper — short-term i.o.u.’s used by businesses and banks for daily expenses — were up for a second week, rising $50.5 billion, to $1.6 trillion. That is down from the peak in July 2007, but a significant improvement from last month, when the market for such financing virtually froze up.

The Treasury’s benchmark 10-year bill rose 4/32, to 102 17/32, and the yield, which moves in the opposite direction from the price, was at 3.69 percent, down from 3.70 percent late Wednesday.

The South Korean central bank joined in the rate activity on Friday morning, cutting its benchmark rate by a quarter point, its third reduction in a month.

Nevertheless, the Kospi stock index in South Korea was down more than 3 percent in early trading. Other Asian indexes also fell. The Nikkei in Japan was down 5 percent, and the S.& P./ASX index in Australia fell 3.8 percent.

Oil prices dropped $4.53, to $60.77 a barrel.

The Labor Department said on Thursday that new claims for unemployment benefits declined last week by 4,000, to 481,000; readings above 400,000 are considered recessionary. The agency also said that worker productivity grew at an annual rate of 1.1 percent in the third quarter, down from a 3.6 percent growth rate in the second quarter.

Bettina Wassener and Julia Werdigier contributed reporting.

New York Times

November 5, 2008

In Modeling Risk, the Human Factor Was Left Out

By STEVE LOHR

Today’s economic turmoil, it seems, is an implicit indictment of the arcane field of financial engineering — a blend of mathematics, statistics and computing. Its practitioners devised not only the exotic, mortgage-backed securities that proved so troublesome, but also the mathematical models of risk that suggested these securities were safe.

What happened?

The models, according to finance experts and economists, did fail to keep pace with the explosive growth in complex securities, the resulting intricate web of risk and the dimensions of the danger.

But the larger failure, they say, was human — in how the risk models were applied, understood and managed. Some respected quantitative finance analysts, or quants, as financial engineers are known, had begun pointing to warning signs years ago. But while markets were booming, the incentives on Wall Street were to keep chasing profits by trading more and more sophisticated securities, piling on more debt and making larger and larger bets.

“Innovation can be a dangerous game,” said Andrew W. Lo, an economist and professor of finance at the Sloan School of Management of the Massachusetts Institute of Technology. “The technology got ahead of our ability to use it in responsible ways.”

That out-of-control innovation is reflected in the growth of securities intended to spread risk widely through the use of financial instruments called derivatives. Credit-default swaps, for example, were originally created to insure blue-chip bond investors against the risk of default. In recent years, these swap contracts have been used to insure all manner of instruments, including pools of subprime mortgage securities.

These swaps are contracts between two investors — typically banks, hedge funds and other institutions — and they are not traded on exchanges. The face value of the credit-default market has soared to an estimated $55 trillion.

Credit-default swaps, though intended to spread risk, have magnified the financial crisis because the market is unregulated, obscure and brimming with counterparty risk (that is, the risk that one embattled bank or firm will not be able to meet its payment obligations, and that trading with it will seize up).

The market for credit-default swaps has been at the center of the recent Wall Street banking failures and rescues, and these instruments embody the kinds of risks not easily captured in math formulas.

“Complexity, transparency, liquidity and leverage have all played a huge role in this crisis,” said Leslie Rahl, president of Capital Market Risk Advisors, a risk-management consulting firm. “And these are things that are not generally modeled as a quantifiable risk.”

Math, statistics and computer modeling, it seems, also fell short in calibrating the lending risk on individual mortgage loans. In recent years, the securitization of the mortgage market, with loans sold off and mixed into large pools of mortgage securities, has prompted lenders to move increasingly to automated underwriting systems, relying mainly on computerized credit-scoring models instead of human judgment.

So lenders had scant incentive to spend much time scrutinizing the creditworthiness of individual borrowers. “If the incentives and the systems change, the hard data can mean less than it did or something else than it did,” said Raghuram G. Rajan, a professor at the University of Chicago. “The danger is that the modeling becomes too mechanical.”

Mr. Rajan, a former chief economist at the International Monetary Fund, points to a new paper co-authored by a University of Chicago colleague, Amit Seru, “The Failure of Models That Predict Failure,” which looked at securitized subprime loans issued from 1997-2006. Their research concluded that the quantitative methods underestimated defaults for subprime borrowers in what the paper called “a systematic failure of default models.”

A recent paper by four Federal Reserve economists, “Making Sense of the Subprime Crisis,” found another cause. They surveyed the published research reports by Wall Street analysts and economists, and asked why the Wall Street experts failed to foresee the surge in subprime foreclosures in 2007 and 2008. The Fed economists concluded that the risk models used by Wall Street analysts correctly predicted that a drop in real estate prices of 10 or 20 percent would imperil the market for subprime mortgage-backed securities. But the analysts themselves assigned a very low probability to that happening.

The miss by Wall Street analysts shows how models can be precise out to several decimal places, and yet be totally off base. The analysts, according to the Fed paper, doggedly clung to the optimists’ mantra that nominal housing prices in the United States had not declined in decades — even though house prices did fall nationally, adjusted for inflation, in the 1970s, and there are many sizable regional declines over the years.

Besides, the formation of a housing bubble was well under way. Until 2003, prices moved in line with employment, incomes and migration patterns, but then they departed from the economic fundamentals.

The Wall Street models, said Paul S. Willen, an economist at the Federal Reserve in Boston, included a lot of wishful thinking about house prices. But, he added, it is also true that asset price trends are difficult to predict. “The price of an asset, like a house or a stock, reflects not only your beliefs about the future, but you’re also betting on other people’s beliefs,” he observed. “It’s these hierarchies of beliefs — these behavioral factors — that are so hard to model.”

Indeed, the behavioral uncertainty added to the escalating complexity of financial markets help explain the failure in risk management. The quantitative models typically have their origins in academia and often the physical sciences. In academia, the focus is on problems that can be solved, proved and published — not messy, intractable challenges. In science, the models derive from particle flows in a liquid or a gas, which conform to the neat, crisp laws of physics.

Not so in financial modeling. Emanuel Derman is a physicist who became a managing director at Goldman Sachs, a quant whose name is on a few financial models and author of “My Life as a Quant — Reflections on Physics and Finance” (Wiley, 2004). In a paper that will be published next year in a professional journal, Mr. Derman writes, “To confuse the model with the world is to embrace a future disaster driven by the belief that humans obey mathematical rules.”

Yet blaming the models for their shortcomings, he said in an interview, seems misguided. “The models were more a tool of enthusiasm than a cause of the crisis,” said Mr. Derman, who is a professor at Columbia University.

In boom times, new markets tend to outpace the human and technical systems to support them, said Richard R. Lindsey, president of the Callcott Group, a quantitative consulting group. Those support systems, he said, include pricing and risk models, back-office clearing and management’s understanding of the financial instruments. That is what happened in the mortgage-backed securities and credit derivatives markets.

Better modeling, more wisely applied, would have helped, Mr. Lindsey said, but so would have common sense in senior management. The mortgage securities markets, he noted, grew rapidly and generated high profits for a decade. “If you are making a high return, I guarantee you there is a high risk there, even if you can’t see it,” said Mr. Lindsey, a former chief economist of the Securities and Exchange Commission.

Among quants, some recognized the gathering storm. Mr. Lo, the director of M.I.T. Laboratory for Financial Engineering, co-wrote a paper that he presented in October 2004 at a National Bureau of Economic Research conference. The research paper warned of the rising systemic risk to financial markets and particularly focused on the potential liquidity, leverage and counterparty risk from hedge funds.

Over the next two years, Mr. Lo also made presentations to Federal Reserve officials in New York and Washington, and before the European Central Bank in Brussels. Among economists and academics, he said, the research was well received. “On the industry side, it was dismissed,” he recalled.

The dismissive response, Mr. Lo said, was not really surprising because Wall Street was going to chase profits in the good times. The path to sensible restraint, he said, will include not only better risk models, but also more regulation. Like others, Mr. Lo recommends higher capital requirements for banks and the use of exchanges or clearinghouses for the trade of exotic securities, so that prices and risks are more visible. Any hedge fund with more than $1 billion in assets, he added, should be compelled to report its holdings to regulators.

Financial regulation, Mr. Lo said, should be seen as similar to fire safety rules in building codes. The chances of any building burning down are slight, but ceiling sprinklers, fire extinguishers and fire escapes are mandated by law.

“We’ve learned the hard way that the consequences can be catastrophic, even if statistically improbable,” he said.

As economy melts away, so does N.Y. sculpture

USA TODAY

NEW YORK (AP) — The economy is melting — literally.

Two artists on Wednesday installed a 1,500-pound ice sculpture that spelled the word "Economy" in Manhattan's financial district.

The "Main Street Meltdown" was to remain in Foley Square until it melted — about 24 hours. By Wednesday evening, the E and the C had already thawed and vanished.

The backdrop to the sculpture — the wide stairs and row of pillars fronting the state Supreme Court building — is instantly recognizable to millions of viewers of TV's "Law & Order."

"To see the word 'economy' melting down is representational of an extreme time," artists Nora Ligorano and Marshall Reese said on their website.

Ban on Gay Marriage Leads in California

Wall Street Journal
NOVEMBER 5, 2008, 10:28 A.M. ET

California Votes for Prop 8

By TAMARA AUDI, JUSTIN SCHECK and CHRISTOPHER LAWTON

California voters overturned same-sex marriage rights in a vote that stands to affect how the issue plays out elsewhere in the nation.

Ban on Gay Marriage Leads in California

2:00

A ban to overturn gay marriage in California was leading in returns but was too close to call even hours after the polls closed, as were several other ballot initiatives in the state. Stacey Delo reports. (Nov. 4)

Proposition 8, which would establish marriage as a union between a man and a woman, passed with 52.1% of the vote, against 47.9% opposed, with 94.6% of precincts reporting. The approval marks a stunning upset in a $70 million campaign that just weeks ago looked to be running in favor of preserving gay marriage rights.

The passage of Prop 8, as it is known, would be a major victory for religious conservatives seeking to ban gay marriage in other states, and a crippling setback for the gay rights movement nationwide.

"This is a critical vote,'' said Carrie Gordon Earll, spokeswoman for Focus on the Family, a conservative group that supported the proposition.

The proposition seeks to reverse a ruling from the California Supreme Court, which earlier this year declared that banning same-sex marriage was discriminatory. The proposition would change the state constitution to define marriage as only between a man and a woman.

Related

• Massachusetts Votes to Maintain Income Tax

Even amid a heated presidential election, the contest over Prop 8 emerged as one of the dominant political issues in the state this year, and was a big driver of voter turnout. Observers believe the losing side will suffer a serious blow in the national debate over gay-marriage rights. The winning side will have the momentum and also be able to claim a popular mandate as judges and voters across the country are poised to weigh the issue in other states.

Same-sex marriage is legal in Massachusetts and Connecticut. But California's vote on the issue is expected to have a far greater impact on how same-sex marriage will be received elsewhere.

"No one can underestimate the impact of the largest state in the nation treating all of its citizens equally," said Lorri Jean, head of the Los Angeles Gay & Lesbian Center and a leader of the campaign to protect gay marriage rights, speaking before the polls closed. On the other hand, she said, the losing side would be "seriously wounded."

Getty Images

Supporters of Proposition 8, which would outlaw same-sex marriage throughout California, rally during at St. Frances X Cabrini Church on October 24, 2008.

Jeff Flint, the campaign manager for the effort to ban gay marriage, predicted that the result in California would show that both Democrats and Republicans support Prop 8. "I think the message will be very clear in a state that even Barack Obama looks to win by a large margin that the importance of marriage is still very strong,'' he said Tuesday, while voting was still under way.

Prop 8 supporters were relying Republican voters in rural areas, but also urban African-American voters like Christopher Miracle of Oakland, a 19-year student at nearby California State University Hayward. Mr. Miracle voted for Barack Obama, but voted to support Prop 8. "Look at the bible." he said. "It's not a man and a man."

The issue has become a rallying cry nationally for both causes, with tens of millions of dollars pouring into the campaign from outside of California.

The amount of money raised-- $38 million to support gay marriage and more than $32 million to ban it -- has fueled a fierce campaign marked by rallies, boycotts, celebrity endorsements and a constant rotation of television ads on both sides.

Many religious leaders implored their congregants to support Prop 8. Cash has poured in from church members. The global head of the Church of Jesus Christ of Latter-day Saints, or the Mormon Church, issued a letter in June calling on followers to "do all you can" to back the measure, and Mormons have emerged as some of the biggest Prop 8 fundraisers.

Meanwhile, gay rights activists boycotted the businesses of Prop 8 donors, and trumpeted support from celebrities like Brad Pitt and Samuel L. Jackson.

As voters headed to the polls Tuesday, few appeared to be on the fence about how they would vote.

"Marriage is between a man and a woman," said 67-year-old Marie Barbagelata from Linden, a farming town about 100 miles inland from San Francisco. She voted in favor of Proposition 8, but added she's not opposed to same-sex civil unions.

A few miles away in Stockton, 41-year-old David Qualls said he plans to vote against Proposition 8, saying, "It doesn't affect my marriage."

Gay rights activists have cast their campaign to defeat Prop 8 as a civil rights battle, making comparisons to the fight for racial equality. Conservatives have said it is not a matter of equal rights, since gays and lesbians could still have domestic partnerships.

Prop 8 advocates have warned in ads that schools would be required to teach gay marriage to young children -- a position gay marriage advocates have dismissed as a scare tactic.

If Prop 8 passes, as early results seem to augur, it is unclear what would happen to the status of gay marriages performed in California in the last several months. Thousands of same-sex couples rushed to alter this summer to take advantage of the few months leading up to the vote when gay marriage's legal status was not in question.

The state attorney general, Jerry Brown, has said those marriages would remain valid. But gay rights activists said they fear lawsuits could be filed to dissolve them.

Ms. Jean, who married her partner of 17 years in September, when same-sex marriage was legal, said she would remind supporters that all civil rights struggles face setbacks. "We've got to pick ourselves up and go on. We'll be bloodied for sure but unbowed."

Mr. Flint, the manager of the Prop 8 campaign, said that he hoped Tuesday's outcome would end the debate in California with a decisive victory. But if the proposition were to lose narrowly, he said, "We would consider revisiting the issue."

Redistricting Proposition Gains Ground

A ballot proposition to overhaul California's redistricting practices looked likely to win approval from the majority of state voters, with 54.6% of votes cast in favor of the measure, with 12.6 percent of the vote reporting.

Proposition 11, also known as the Voters First Act, was designed to overhaul a California law that lets the state legislature determine the boundaries of political districts. That law has been the subject of increased criticism, as political organizations accuse legislators of mapping districts to their political advantage.

The proposition was opposed by many state legislators and backed by Gov. Schwarzenegger. Under the plan, redistricting will be decided by a 14-member independent committee. The next redistricting will occur in 2011, according to current state laws.

The ballot initiative received particular attention in the wake of a three-month-long battle between California's Democratic-led legislature and Republican Gov. Schwarzenegger over the $104.3 billion state budget. Many blamed the budget gridlock on entrenched incumbents who had little incentive to compromise with one another.

Polls indicated the measure was gaining support amongst voters. According to a poll earlier this month from the Public Policy Institute of California, 41% of Californians favor the proposition, with 34% against and 25% undecided. That compares with 38% in favor and 33% against in September.

Days before the election, supporters had expressed concern that a large number of voters polled were still undecided on the measure, indicating that they had not done a good enough job of explaining the Voters First Act and why it mattered. At the same time, the proposition was overshadowed by more contentious battles such as Proposition 8, which would ban gay marriage.

Voters on the ground also indicated that they didn't know much about Proposition 11 putting it low on their list of voting priorities.

Shannon Miller, a 24 year old assistant front desk manager at a San Francisco hotel, abstained from voting for Proposition 11, because she says she didn't know enough about it to make an educated choice and thought there were other more important issues to vote on.

"Redistricting. We need to do more immediate things," she said.

Separately, California has set many a social trend. Now voters in the Golden State may start setting trends in a new area: animal care. A ballot measure called Proposition 2, which would prohibit ranchers from keeping chickens, veal calves and breeding pigs in pens or cages that are too small for the animal to move, was approved with 60.9% of the vote cast in favor of the measure with 100% of the vote reported.

—Bobby White and the Associated Press contributed to this article

Write to Tamara Audi at tammy.audi@wsj.com, Justin Scheck at justin.scheck@wsj.com and Christopher Lawton at christopher.lawton@wsj.com

Eight Weeks of Financial Turmoil

September 27, 2008

Eight Weeks of Financial Turmoil

Multimedia graphic with sound, photos, and video

Stocks Rally as Americans Vote

New York Times
November 5, 2008

By SHARON OTTERMAN

Wall Street built on recent gains Tuesday as reduced volatility and easing in the credit markets helped give stocks their strongest Election Day rally in 24 years.

The Standard & Poor’s 500-stock index closed above 1,000 for the first time since Oct. 13, gaining 4 percent, and the technology-heavy Nasdaq had its sixth consecutive daily rise. At the close, the Dow Jones industrial average was up 3.2 percent, or 305.45 points, to 9,625.28. The broader S. & P. 500-stock index was up 39.45 points, to 1,005.75, and the Nasdaq was up 3 percent, to 1,780.12.

Crude oil settled at $70.44 a barrel, up $6.53 in New York trading on speculation that the world’s largest oil exporter, Saudi Arabia, had cut supplies to some buyers.

The euro rose about 3 cents Tuesday, to $1.29. The dollar lost ground to the yen, the pound and other currencies as well.

Historically, Wall Street has enjoyed a bounce in the fourth quarter after a presidential election as investors breathe a sigh of relief that the long election cycle, with its accompanying uncertainty, has ended. Some analysts said investors seemed to be trying to get a jump on the expected rally by buying on Election Day.

“We don’t know if it’s the end of the bear market yet, but it looks as though the bear has taken a nap,” said Sam Stovall, chief investment strategist at Standard & Poor’s equity research. “So investors are thinking, let’s enjoy a bit of a relief, both from the market’s lows and from the endless pre-election rhetoric.”

Other analysts said they believed the elections only had a peripheral effect on the market, as there had been no major surprises. More important to the rally, they said, were a continuing round of coordinated interest rate cuts worldwide, the continuing thaw in the credit markets and the increasing resiliency of the markets to the daily drumbeat of bad economic news. The extreme volatility of recent weeks has calmed, though trading volume remained light.

The Chicago Board Options Exchange’s volatility index — or VIX — dipped below 50 for the first time since Oct. 14. Wall Street has rallied 18.3 percent since the close on Oct. 27, including the 10.8 percent gain on Oct. 28.

“Investors are starting to look ahead of some of these numbers to 2009, and they are starting to see a bit of recovery,” said Ryan Larson, head equity trader at Voyageur Asset Management. “Some of the volatility is coming out of the marketplace.”

Underlying the market’s new-found stability, the stock markets showed little reaction as the government reported that new orders for manufactured goods in September dropped $11.2 billion, or 2.5 percent, to $432 billion, a larger-than-expected loss. This followed a 4.3 percent August decrease.

It was the second negative manufacturing report in two days. On Monday, the Institute for Supply Management’s index of manufacturing activity in the United States fell to 38.9 in October, from 43.5 in September, the worst reading since September 1982. The markets also seemed to take that news in stride, spending the day trading in a narrow range before eventually ending the day flat, indicating that much of the bad news had been already priced into stock prices.

The rally that unfolded on Wall Street was broad-based. All industry sectors in the S.& P. index rose, led by telecommunications and energy stocks. Among the 30 blue-chip stocks that make up the Dow, General Electric, Verizon Communications and Caterpillar were among the strongest performers.

The stock exchange first opened for trading on Election Day in 1984. That year, the Dow rose 1.2 percent, a gain not topped since, as Ronald Reagan was re-elected.

Shares in MasterCard, the world’s second-biggest credit card company after Visa, jumped 18 percent after the company said that higher overseas revenue had helped bolster profit.

Still, the company warned that the economic slowdown would affect profit in the near term.

Archer Daniels Midland, the world’s largest grain processor, was up 15 percent as earnings more than doubled on rising commodity prices.

Building on a trend from the last several days, the credit markets eased further on Tuesday, with interbank and corporate borrowing rates declining significantly. The London interbank offered rate, or Libor, a benchmark that banks charge one another, fell to 0.375 percent.

The Treasury’s 10-year bill rose 1- 17/32, to 102- 7/32, and the yield, which moves in the opposite direction from the price, was at 3.72 percent, down from 3.91 percent late Monday.

The rate corporations pay for short-term loans known as commercial paper, a part of the market that had seized up in recent weeks, making it hard for businesses to borrow, dropped to 2.88 percent for three-month loans, down from 3.31 percent on Monday. It was the lowest the rate has been since mid-September.

Last week, the Federal Reserve began lending directly to corporations through commercial paper. Those efforts and many others from central banks around the world appear to be helping restore a degree of normalcy to the debt market after weeks of tumult.

Still, in some important parts of the market, conditions remain far from normal. Yields on mortgage securities, which determine mortgage interest rates, remain at elevated levels though they have fallen somewhat in the last couple of days. Last week, the average interest rate on 30-year fixed-rate mortgages was 6.46 percent, up from 6.04 a week earlier, according to Freddie Mac.

Excluding transportation like aircraft and autos, demand for manufactured goods decreased 3.7 percent in September, the largest decrease since the start of record-keeping in 1992.

Still, the news remained in line with weeks of economic data indicating that the economy took a sharp downturn beginning in the third quarter as ripples from the subprime mortgage crisis began to constrain access to credit severely. Stock markets were also higher in Europe and Asia. The Dow Jones Euro Stoxx 50 index, a barometer of euro zone blue chips, rose 5.5 percent, while the FTSE 100 index in London rose 4.4 percent. The CAC 40 in Paris gained 4.6 percent, and the DAX in Frankfurt was up 5 percent.

In Tokyo, the Nikkei 225 stock average jumped 6.3 percent, as investors returned from a holiday Monday. The Hang Seng index in Hong Kong rose 0.3 percent.

In Sydney, the S.& P./ASX 200 index closed 0.2 percent lower, after the Australian central bank surprised the markets on Tuesday with a larger-than-expected interest rate cut. The bank cut its main interest rate target by three-quarters of a percentage point, to 5.25 percent, rather than by the half-point that had been widely expected.

“International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well,” the Reserve Bank of Australia said in a statement.

Policy makers worldwide are racing to prop up banks, calm volatile stock markets and inject steam into their flagging economies by trying aggressively to reduce the cost of borrowing.

The Federal Reserve Board in Washington last week lowered its benchmark interest rate by half a percentage point, to 1 percent, its second big rate cut this month. The Bank of Japan last week cut its main rate target to 0.3 percent from 0.5 percent. The European Central Bank and the Bank of England are expected to cut rates on Thursday.

Following are the results of yesterday’s Treasury auction of 238-day cash management bills and four-week bills:

David Jolly, Bettina Wassener and Vikas Bajaj contributed reporting.