Indexes pared earlier losses as investors weighed a bailout plan for Fannie Mae and Freddie Mac and weakness in bank stocks
Major U.S. stock indexes ended narrowly lower Monday as investors pondered rescue plans unveiled Sunday by the U.S. Treasury and Federal Reserve for troubled mortgage-finance giants Fannie Mae (FNM) and Freddie Mac (FRE).
Regional bank shares plunged after the FDIC's takeover late Friday of IndyMac Bank in Pasadena, Calif., and amid reports that several other banks could collapse due to the U.S. housing crisis.
Traders were bracing for Fed chairman Ben Bernanke’s semi-annual testimony before the Senate Banking Committee on Tuesday, where lawmakers are sure to press the central bank chief on the Fannie/Freddie rescue plan. Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox are also expected to testify before the panel.
Bill Stone, PNC Wealth Management chief investment strategist, said he expects policymakers "to avert any systemic financial failure at all costs."
"This, however, does not preclude more heart-stopping volatility and the problems in the financial sector from spilling over into the general market at times," Stone added.
Bonds were higher after a strong $3 billion auction of Freddie Mac debt. The dollar index edged higher. Oil prices were flat but remained near record levels, after President Bush lifted the U.S. offshore drilling ban Monday afternoon.
Gold was up as the Fannie and Freddie rescue will make it hard for the Fed to raise rates.
On Monday, the Dow Jones industrial average fell 45.35 points, or 0.41%, to 11,055.19. The broader S&P 500 index lost 11.19 points, or 0.9%, to 1,228.30. The tech-heavy Nasdaq composite index fell 26.21 points, or 1.17%, to 2,212.87.
Shares of Fannie and Freddie plunged last week on the worries about their solvency in the face of mounting mortgage losses. However, the Federal Reserve announced Sunday it will lend to the mortgage financiers if necessary. And, Treasury Secretary Henry Paulson said he would ask Congress to approve an extension of Fannie and Freddie's lines of credit, and an equity investment in the firms if necessary.
Shares of Fannie and Freddie had a volatile Monday, with Freddie ending down 8.25% and Fannie off 5.07%, but both moving in and out of positive territory during the day.
Traders Monday were also weighing news that Anheuser-Busch Companies (BUD) has agreed to be acquired by Belgian brewer InBev for $70 per share, or $52 billion. Anheuser had been fighting a buyout, but relented after InBev raised its offering price. The deal, which creates the world's largest brewer, is expected to be completed by the end of the year.
In the first bank failure of the financial crisis, IndyMac Bancorp's (IMB) IndyMac Bank was seized over the weekend by federal regulators. Deposits at the mortgage firm's banking unit were insured by the Federal Deposit Insurance Company by up to $100,000.
Amid the jitters over IndyMac, other bank shares were taking a beating, with the S&P Regional Banks index dropping 8.77% and the S&P Diversified Banks index down 7.34%. The hardest-hit bank in the S&P 500 was Washington Mutual (WM), which plunged 36%.
Shares of regional bank Zions Bancorp (ZION) lost 23.2% after it was downgraded by a Goldman Sachs analyst from neutral to sell. Wachovia Bank (WB) shares fell 12.5% after it was downgraded from buy to neutral by a UBS Financial analyst.
National City (NCC) shares plummeted 27.6%, supposedly on market rumors, according to contacts cited by Action Economics. Trading was halted on the stock at one point in Monday’s session. In a statement the bank holding company indicated it is experiencing no unusual depositor or creditor activity, reports Action. National City stated it maintains one of the highest Tier 1 capital ratios among any of the large banks, maintaining over $12 billion in short term liquidity.
M&T Bank Corp. (MTB) shares dropped after the company posted second quarter EPS of $1.44, vs. $1.95 one year earlier, on 24% lower net operating income and higher credit costs.
Elsewhere, Republic Services (RSG) received a $34-per-share, or $6.2 billion, buyout proposal from Waste Management (WMI), the U.S.'s largest trash hauler. In June, Republic, the third-place trash firm, agreed to acquire second-place Allied Waste Industries (AW) for $6.24 billion.
August WTI crude oil futures were up 10 cents to $145.18 per barrel on Monday after President Bush lifted the executive ban on offshore drilling. Democrats blasted the action, saying they supported developing low cost fuels, going after speculators, and drawing oil from the strategic petroleum reserve.
Among other stocks in the news Monday, Yahoo (YHOO) rejected a joint proposal from Microsoft (MSFT) and Carl Icahn to restructure and break apart the company.
Republic Airways Holdings (RJET) said it would cut 500 employees, or 10% of its workforce.
United Capital Corp. (AFP) says its chairman, president and chief executive, A.F. Petrocelli proposed buying the firm for $23 per share, an 18% premium.
Major European indexes moved higher Monday. In London, the FTSE 100 index rose 0.74% to 5,300.40. In Paris, the CAC 40 added 1.02% to 4,142.53, while Germany's DAX index gained 0.76% to 6,200.25.
In Asia, Japan's Nikkei 225 moved 0.23% lower to 13,010.16, while Hong Kong's Hang Seng Index fell 0.77% to 22,014.46.
Treasuries rallied on the financial worries. The ten-year note jumped 20/32 to 99-29/32 for a yield of 3.88%, and the 30-year bond surged 35/32 to 98-13/32 for a yield of 4.47%.