- The Washington Times - Tuesday, September 23, 2008

UPDATED:

NEW YORK (AP) – Financial markets resumed their pullback Tuesday as investors worried that lawmakers were losing the sense of urgency seen last week, when the government proposed a massive bailout for financial institutions as a way to revive ailing credit markets.

Investors grew fearful that top economic officials updating Congress about efforts to work out a $700 billion financial rescue plan were facing a greater degree of second-guessing from lawmakers than expected. The Dow Jones industrials, up for much of the session, were down more than 125 points by early afternoon.

Still, trading appeared more orderly than Monday, when investors rushed into hard assets like oil and gold. Meanwhile, demand remained high for 3-month Treasury bills, considered the safest short-term financial asset, while the dollar regained ground after being hard hit Monday.

After days of intense gyrations in financial markets, investors are anxious over whether the plan to absorb bad mortgages and other risky assets will help steer the economy onto more solid footing.

Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairman Christopher Cox testified before lawmakers, who are working with the Bush administration to complete the details of the bailout.

But traders grew nervous as the officials faced questions about whether the government’s planned response was appropriate. Sen. Chuck Schumer, D-N.Y., for example, asked whether $150 billion might be adequate to get the program started if more money were promised.

The market remains uncertain about how long it will take for the bailout plans to take effect, and when they do, how effective they will be.

“There’s skepticism about whether the $700 billion number is the right number,” said Jim Herrick, manager and director of equity trading at Baird & Co.

Bernanke told the Senate Banking Committee that Congress risks triggering a recession if it doesn’t act on the plan. He said inaction could leave a range of businesses unable to borrow the money while consumers could find it impossible to finance big purchases like cars and homes.

Financial markets showed uneasiness as investors listened to the testimony, but not the fear and volatility that dominated Monday’s trading.

The market for short-term Treasurys appeared stable, though not relaxed. The yield on the 3-month T-bill rose to fell to 0.81 percent from 0.88 percent on Monday; last week, it was around zero after investors flooded money into T-bills as the credit markets seized up. That spurred the Bush administration to formulate its debt buyout plan.

The yield on the benchmark 10-year Treasury note, which trades opposite its price, fell to 3.81 percent from 3.85 percent late Monday.

The dollar, whose decline Monday drove some of the frenetic trading in other markets, was higher against other major currencies, while gold prices declined after starting the week with a big advance.

In early afternoon trading, the Dow fell 129.11, or 1.17 percent, to 10,886.58 after having risen more than 125 points in the early going. On Monday, the Dow fell more than 370 points as investors scrambled for the safety of hard assets like oil and gold.

Broader stock indicators also dropped. The Standard & Poor’s 500 index fell 15.87, or 1.31 percent, to 1,191.22, and the Nasdaq composite index fell 17.76, or 0.82 percent, to 2,161.22.

“We had what felt like a bottom a few days ago, and I think we’re going to retest the lows,” Herrick said.

Investors also were watching oil prices after anxiety over the government bailout and a huge short-covering rally pushed crude to the biggest one-day gain.

Light, sweet crude for November delivery fell $4.70 to $104.67 on the New York Mercantile Exchange. The October contract, which expired Monday, surged as much as $25.45 to $130 before falling back to settle at $120.92, an advance of $16.37. While that gain was due to technical market dynamics, the price of oil has still moved higher over the past week amid increasing concerns about the U.S. financial system.

“We’re going to see this volatility for a while even after this package passes because I think we’re still facing a fundamental slowdown in the economy worldwide which is going to have some impact on earnings,” said J. Stephen Lauck, chief executive and portfolio manager at Ashfield Capital Partners in San Francisco.

Financial stocks fell as Congress debated the merits of the government’s emerging plan. Some investors are worried that the plan could still prove inadequate to save some banks. Should the government pay too little for assets some banks might be forced to book ruinous write-downs and perhaps go under.

Bank of America Corp. fell $1.44, or 4.2 percent, to $32.71, while Citigroup Inc. fell $1.57, or 7.9 percent, to $18.44. Washington Mutual Inc. fell 17 cents, or 5.2 percent, to $3.16.

Some energy names lost ground as oil traded well off the levels seen in Monday’s spike. Occidental Petroleum Corp. fell $3.90, or 4.8 percent, to $77.34 and XTO Energy Inc. declined $1.29, or 2.5 percent, to $51.15.

In addition, some industrial names slid as investors worried about the well-being of the global economy. Aluminum maker Alcoa Inc. fell $1.07, or 4 percent, to $25.73. Seed company Monsanto Co. fell $4.40, or 3.8 percent, to $112.59.

Overseas, Britain’s FTSE 100 fell 1.91 percent, Germany’s DAX index slid 0.64 percent, and France’s CAC-40 fell 1.98 percent. Japanese financial markets were closed Tuesday for a national holiday.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 585.9 million shares.

The Russell 2000 index of smaller companies fell 6.97, or 0.97 percent, to 713.47.

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