Dow Sinks 411 Points as Investor Nerves Fray

Propping up consumer financing arms of large manufacturing companies such as General Motors (GM Quote), Ford (F Quote) and General Electric (GE Quote) is an effort to stave off bankruptcy, said Matthew Smith, president of Smith Affiliated Capital.

Smith said bankruptcy would allow the profitable arms of such companies to keep going, while sloughing off the parts that are losing money. If the government intervenes to stave off bankruptcy, "Effectively they're allowing these businesses to keep on existing in the state they are. And it ends up being a zombie state. It's almost self-defeating, the fact that you're going to supply money to the financial arm. Trying to sell cars and machinery in a recession, it doesn't make sense," he said.

Mark Pado, U.S. market strategist for Cantor Fitzgerald, said that Paulson had to alter the initial TARP plan to buy troubled assets from financial institutions because Congress waited too long to pass the bailout legislation. If the Treasury had been able to get troubled assets off banks' balance sheets before the end of the third quarter, the government wouldn't have had to resort to recapitalization, he said. "It was too late by the end of September," he said.

As for bolstering consumer credit facilities, "I think that it's all intertwined," said Pado. "We relate this to being a housing issue but it's really a leverage issue." Pado said that he understands the free-market impulse to let businesses that made bad loans go under, but with credit markets this frozen, allowing consumer-finance institutions to go under would deny borrowers another needed source of lending.