- The Washington Times - Wednesday, February 25, 2009

UPDATED:

Wall Street seesawed in late trading but racked up a loss Wednesday over uncertainty about a complicated government formula for helping debt-ridden major banks and because of fewer sales of existing homes than expected last month.

All three of the major market indexes fell more than 1 percent.

At the close, the Dow Jones Industrial Average dropped 80.05, or 1.09 percent, to 7,270.05. The Nasdaq, home to many high-tech stocks, fell 16.40, or 1.14 percent, to 1,425.43. The broader Standard & Poor’s 500 slid 8.24, or 1.07 percent, to 764.90.

Related article:Existing-home sales fall by 5.3 percent in January

The markets opened lower on a report that sales of existing homes fell 5.3 percent in January, their lowest level in nearly 12 years, spoiling hopes of a recovery in the housing market.

But Wall Street rallied late in the session after the Treasury Department said it will make more taxpayer money available to the nation’s 19 biggest banks. The rally then fizzled, apparently because of remaining uncertainty over details that include a “stress test” for the banks that is to be completed by the end of next month.

Money for banks that have assets of more than $100 billion would be made available through a complex formula involving the government purchase of a bank’s preferred stock, which could be converted into common shares. Common shares carry with them voting rights.

Government money to buy the preferred stock presumably would come from the remaining half of the $700 billion that Congress authorized late last year to bail out ailing financial institutions.

In their stress test, regulators will use two different scenarios to determine a bank’s financial health.

One would project a 2 percent contraction of the economy this year, 8.4 percent unemployment, housing prices falling 14 percent and 2.1 percent economic growth in 2010. The second would project a 3.3 percent shrinkage of the economy this year, 8.9 percent unemployment, housing prices dropping 22 percent and 0.5 percent growth next year.

Unemployment is 7.6 percent, the highest since the recession of 1981-82, but is expected to worsen. The economy grew 1.3 percent for all of last year but fell 3.8 percent in its final three months.

“There’s lots of uncertainty,” James Shelton, an analyst with Kanaly Trust Co. of Houston, told CNBC early in the trading session. “Businesses are falling off a cliff across the globe. We need to find some stability.”

The National Association of Realtors reported that the sales of existing homes fell a surprising 5.3 percent to an annual rate of 4.49 million units in January from 4.74 million units in December, the weakest showing since July 1997. Buyers may be waiting for lower mortgage interest rates.

Sales had been expected to increase to an annual rate of 4.79 million units, according to Thomson Reuters.

At the same time, the real estate group said the median price of a home nosedived to $170,000, a 14.8 decline from $199,800 a year earlier, the biggest drop since March 2003. The median price is that at which half sell at a higher rate, half at a lower rate.

The housing market, a cornerstone of the economy, is one of the chief causes of the financial crisis, and Wall Street investors have been hoping for a return to stability as a signal that the recession may be reaching bottom.

The Obama administration has pledged to pump between $75 billion and $275 billion into the housing market to prevent more foreclosures among homeowners.

In the corporate world, the Ford Motor Co. and the United Auto Workers union agreed Tuesday that the automaker will make buyout or early-retirement offers to 42,000 hourly workers in a concession intended to make the company competitive with General Motors Corp. and Chrysler LLC, the Associated Press reported.

Ford is the only one of the Big Three that has not received any federal bailout money. GM and Chrysler, a private company, have received $17.4 billion and have asked for a total of $39 billion.

In addition, according to a Ford memo obtained by AP, the company’s two top executives, CEO Alan Mulally and Executive Chairman Bill Ford Jr., will take 30 percent pay cuts this year.

Other concessions made by the UAW include the suspension of cost-of-living raises, lump-sum performance bonuses and year-end bonuses in the remaining three years of its contract with Ford, the AP said.

GM already has said it will dismiss another 47,000 workers in its bid to restructure the company, and Chrysler has said it will let go of another 3,000.

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