The Signal

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Tuesday December 5th

Stocks fall as investors await bank bailout plan

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NEW YORK (AP) - Financial markets pulled back in uneasy trading Monday as investors awaited details of the government's plan to buy $700 billion in banks' mortgage debt. The Dow Jones industrial average fell more than 200 points while the credit markets remained nervous, but not showing the signs of panic Treasury trading saw last week.

Investors are relieved federal authorities are taking action to relieve the nation's banks of their toxic assets. But it is not sure yet how successful the plan will be in thawing credit markets, which many businesses depend on to fund day-to-day operations, and for propping up the still-weak housing market.

Bush administration officials and congressional leaders have been meeting on the rescue plan, the thrust of which congressional leaders have endorsed. Many market observers are hoping for details of the plan to emerge by midweek. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are scheduled to appear before Congress today for a briefing on the economy.

"For now I think the market is giving everyone the benefit of the doubt," Axel Merk, portfolio manager at Merk Funds, said. "This is not an 'all is clear' signal that we have now."

While investors try to determine how helpful the government's lifeline might be, they also were absorbing more news about the rapid changes in the banking sector. Morgan Stanley said it is working to sell up to a 20 percent stake to Japan's Mitsubishi UFJ Financial Group Inc., perhaps a sign the government's stabilizing hand will make investors more willing to put money into banks.

The announcement came after the Federal Reserve late Sunday granted Morgan Stanley and Goldman Sachs, the country's last two major investment banks, approval to change their status to bank holding companies. The change of status will allow the companies to set up commercial banks that will be able to take deposits, significantly bolstering the resources of both. They also will be subject to more regulation.

That shift came a week after negotiations failed to save Lehman Brothers Holdings Inc. That, and the government's plan to bail out American International Group Inc., helped lead to a seizing of the credit markets that spurred the government to formulate its plan to rescue companies from their crippling debt.

The yield on the Treasury's 3-month Treasury bill was at 0.93 percent Monday, down slightly from 0.94 percent late Friday, indicating investors were still willing to take low returns on a safe asset. However, the yield was a far cry from yields around zero at the height of last week's frenetic buying. Yields move in the opposite direction from price. Short-term Treasurys are seen as the absolute safest place to invest cash.


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