- The Washington Times - Thursday, February 26, 2009

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 7,270.89. 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. The Russell 2000 index of smaller companies fell 11.04, or 2.68 percent, to 401.44.

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 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.

The unemployment rate is currently 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 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 nose-dived to $170,000, a 14.8 percent 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 stem foreclosures.

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