Whipsaw Day Caps Dow's Worst Week Ever

He said the U.S. Treasury should begin guaranteeing money market funds and is right to take equity positions in financial firms as opposed to buying bad debt.

Mendelsohn said the situation isn't hopeless, and the G7 meeting is an opportunity to fix the system. "They've got to come up with a plan on Monday," he said. "Everybody's got to know what the rules are, how the system's going to work moving forward. You have to throw as much money as it takes."

Traders were closely eying an auction of credit default swaps related to bankrupt brokerage Lehman Brothers. The auction is expected to bring heavy losses to sellers of the swaps, which function as insurance against a default on company debts. The market for these derivatives has been tied up as credit markets showed at best a mixed reaction to internationally coordinated rate cuts initiated earlier in the week.

The final settlement price for the Lehman credit default swaps came in at 8.625 cents, meaning that sellers of Lehman CDS will have to pay buyers 91.375 cents on the dollar, a higher payment than expected.

"The Lehman auction could turn things around," said Paul Nolte, director of investments at Hinsdale Associates. "What has to enter the market, I think, is some level of trust. And right now, there isn't." He said that seeing the Lehman credit-default swaps clear will help get the financial system moving again.

Lehman's bankruptcy triggered the crisis, said Mendelsohn. "When the Lehman commercial paper failed, that's what caused the run on money markets," he said.

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