Stocks fell Friday for the second day in a row, but investors are likely to be on edge into early next week awaiting the Treasury Department's plan to help banks and other financial institutions get rid of toxic assets.
Details of the Treasury's plan may be announced as early as Monday and will involve the government financing purchases of bad assets from banks, The Wall Street Journal said late Friday. (Registration required)
But there appeared to be a risk that the plan won't be as large as hoped. And there's a risk -- given the angry furor over the $165 million in bonuses paid to American International Group (AIG, news, msgs) executives -- that Congress won't go along with the plan.
The news came after the Dow Jones industrials finished the day down 122 points, or 1.7%, to 7,278. The Standard & Poor's 500 Index was off 16 points, or 2%, to 769, and the Nasdaq Composite Index was off 26 points, or 1.8%, to 1,457.
It was the Dow's worst loss since March 5, when it fell 281 points. But the major averages did finish higher for the second week in a row. The Dow, which closed the week up 54 points, or 0.8%, hadn't had a two-week win since April 2008.
The S&P and the Nasdaq's two-week gains were their first since the weeks of Dec. 8 and 15. The S&P 500 was up 1.6% on the week, with the Nasdaq up 1.8%.
The market was dragged lower by downgrades of General Electric (GE, news, msgs) and weak financial stocks.
Weighing on the market was the loud uncertainty caused by efforts in Congress to tax bonuses paid to AIG executives and other companies that received federal rescues.
The House passed a bill that would subject bonuses paid to executives to taxes of up to 90%. The Senate will take up the legislation next week.
Critics have charged the legislation is punitive, possibly not enforceable and potentially unconstitutional.
It's not clear if President Barack Obama will sign any bill. He was cool to the idea during his appearance Thursday on "The Tonight Show."
Next up: The new banking plan
The Treasury plan, The Journal said, faces a huge hurdle. Democrats are so angry over the AIG bonuses -- and Republicans want to derail anything that Democrats propose -- that passage of any plan may be tricky.Nonetheless, the plan includes creating an entity, backed by the Federal Deposit Insurance Corp., to purchase and hold loans.
In addition, the Treasury wants to expand a Federal Reserve credit program to include older -- so-called "legacy" -- assets. Currently, it's only set up to buy newly issued securities backing all manner of consumer loans. But some of the most toxic assets are securities created in 2005 and 2006 backed by subprime mortgages, many of which have gone spectacularly bad, particularly in states like California, Nevada, Arizona and Florida.
Perhaps most important, the plan sees the government setting up public-private investment funds to buy mortgage-backed and other securities. Managed by private managers, the funds would be financed with a combination of private and government capital, probably from the Fed with help from the FDIC.
The government would share in any profit or loss.
The goal is to free up markets that have seized up as investors have stood on the sidelines, The Journal said. A big problem is that many of these assets no longer trade, with prices difficult to establish. So banks haven't been willing to sell because of the huge losses that might result, and investors haven't been willing to take the risk.
Bringing private investors to the table will help create market prices, The Journal said, because the two sides could negotiate prices that each could live with.
Complicating matters is a Congressional Budget Office estimate that the federal deficit will hit $1.85 trillion, up $400 billion from its last estimate two months ago.
| Close for week | Wk. ago close | % chg. | 2009 YTD chg. | |
|---|---|---|---|---|
| Dow Jones Industrial Avg. | 7,278.38 | 7,223.98 | 0.75% | -17.07% |
| S&P 500 Index | 768.54 | 756.55 | 1.58% | -14.91% |
| Nasdaq Composite Index | 1,457.27 | 1,431.50 | 1.80% | -7.59% |
| Russell 2000 Index | 400.11 | 393.09 | 1.79% | -19.89% |
| Crude oil per barrel | $51.06 | $46.25 | 10.40% | 14.48% |
| 10-yr. Treasury yield | 2.63% | 2.63% | 0.00% | 16.98% |
| Gold per troy ounce | $956.20 | $930.10 | 2.81% | 8.13% |
AIG is an emotional downer
Sure, the market finished higher for the week, but it was nothing to write home about. The Dow S&P 500 and Nasdaq had all been up 4% or higher after Wednesday's rally.The mood on Wall Street seemed to darken as the AIG controversy raged.
Not so much because investors thought AIG was being unfairly singled out. Rather the fear was that Congress' legislation to tax the AIG bonuses and other bonuses retroactively would drive top talent out of banks and other financial companies that have received government aid.
Nineteen states now have opened investigations into the bonuses. AIG employees have reported receiving death threats. Things got so hysterical that New York Times business columnist Joe Nocera wrote, "I'm worried that the political response is making the (economic) crisis worse."
There were three additional weights on the markets:
- Concern about the sheer size of the Federal Reserve's plan to buy up to $1.2 trillion in mortgage and government securities to inject more cash into the financial session. While some analysts believe the move will help the economy, others fear it will debase the dollar and reignite inflation. That worry may affect markets next week.
- Quarterly expirations of stock options, index options, index futures and single stock futures. The expirations required many traders to sell positions to square up for the weekend.
- Failure of the Dow and the S&P 500 to cross over and remain above their 50-day moving averages on Wednesday and Thursday. Technical analysts were watching closely how the indexes would fare against the moving averages to gauge investor confidence. That they hit the averages and promptly fell back suggested weak confidence. Confirmation of that weakness came Friday when the Nasdaq, which had crossed its 50-day average on Wednesday, fell below it again.
In addition to the bank plan, the markets next week face reports on existing-home sales on Monday and new-home sales on Wednesday; jobless claims and a last look at fourth-quarter gross domestic product on Thursday; and personal income on Friday.
Earnings are due Monday from Tiffany (TIF, news, msgs) and Walgreen (WAG, news, msgs) on Monday; circuit-board maker Jabil Circuit (JBL, news, msgs) and spice processor McCormick (MKC, news, msgs) on Tuesday; and Dr. Pepper Snapple Group (DPS, news, msgs) on Thursday.
What drove the market lower
Weakness in General Electric, Goldman Sachs (GS, news, msgs) and financial stocks infected the entire market. Only six of the 30 Dow stocks were higher on Friday, along with just 75 S&P 500 stocks and 12 stocks in the Nasdaq-100 Index ($NDX.X).GE was the fourth-worst Dow performer, down 5.8% to $9.54 on continuing skepticism about its insistence that its GE Capital unit will be profitable this year. The unit faces problems from investments in weakening commercial real estate markets, the continuing housing crunch and worries about loans it made to customers in Eastern Europe.
Analysts including Citigroup's Jeffrey Sprague, Credit Suisse's Nicole Parent, Morgan Stanley's Scott Davis and Deutsche Bank AG’s Nigel Coe cut their estimates for 2009 per-share profit after GE's five-hour presentation about its prospects on Thursday.
Goldman Sachs was off 2% to $97.32, despite its insistence Friday that its exposure to AIG is well-hedged. The investment bank said it has $4.4 billion in collateral against its $6 billion exposure to AIG.
The exposure is down from as much as $20 billion a year or so ago and $10 billion when the government took over AIG in September.
The AIG controversy weighed on just about any bank or financial institution that had taken money from the government's Troubled Asset Relief Program. Bank of America (BAC, news, msgs) was down 10.7% to $6.19 and was the worst of Dow performer. Wells Fargo (WFC, news, msgs) was off 9.3% to $13.99. US Bancorp (USB, news, msgs) slipped 5.9% to $13.42.
Financials also retreated after former Federal Reserve Chairman Alan Greenspan said banks will need a "very large" amount of capital from either the government or private investors to ensure their soundness and return to normal levels of lending.
Crude oil and other commodities all moved lower Friday as the dollar rallied against major currencies after fallling for eight straight days. Gold closed down $2.60 an ounce to $956.20, gaining 2.8% on the week.
Crude oil was off 55 cents to $51.06 a barrel, but it finished the week up 10.4%. It is up 14.5% for the year. Energy stocks, however, were lower.
Citigroup analyst Robin Shoemaker said first-quarter earnings for oil services stocks may fall short of analyst estimates because of falling prices and sales. Schlumberger (SLB, news, msgs) declined 6.3 percent to $41.52. Halliburton (HAL, news, msgs) lost 5.5% to $16.84.
Separately, a three-judge panel denied super-scammer Bernard Madoff's request to be released from jail and go back to luxurious house arrest in his penthouse while he awaits his sentencing in June.
| Fri. | Thur. | Chg. | Month chg. | YTD chg. | |
|---|---|---|---|---|---|
| Crude oil (NYMEX) (per barrel) | $51.06 | $51.61 | -$0.55 | 14.08% | 14.48% |
| Heating oil (per gallon) | $1.3834 | $1.3563 | $0.0271 | 9.28% | -1.59% |
| Natural gas (per million BTU) | $4.2270 | $4.1740 | $0.0530 | 0.69% | -24.81% |
| Unleaded gasoline (per gallon) | $1.4570 | $1.4373 | $0.0197 | 13.77% | 44.51% |
Citigroup shakes up senior management
Citigroup (C, news, msgs) this morning said Chief Financial Officer Gary Crittenden will become chairman of Citi Holdings, the company's troubled banking unit. Mike Corbat will continue serving as interim chief executive officer of Citi Holdings, a division that's separate from Citibank.Edward Kelly will succeed Crittenden as Citigroup's chief financial offer.
Citigroup has been struggling to get rid of its toxic assets after losing $37.5 billion in the past five quarters. Citi shares gyrated all day but closed up 0.8% to $2.62. For the week, the stock was up 16.9%.
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Jubak: AIG bonuses aren't too badTaxpayers now own AIG so why aren't they acting like it? If the $165 million in bonuses paid out to those who took down AIG get them acting like owners, then it's cheap tuition, says Jim Jubak. (March 19, 2009)
Xerox cuts outlook
Xerox (XRX, news, msgs) said Friday that it expects to earn between 3 cents and 5 cents per share in the first quarter, well below its previous forecast of between 16 cents and 20 cents. The consensus estimate is for 18 cents a share.The copier and printer maker said slowing technology spending forced the guidance cut. Shares tumbled 18.7% to $4.34.
Xerox will release its first-quarter report on April 24.
Geithner takes 'responsibility'
The finger pointing on Capitol Hill was loud and nasty all the way into Friday. Treasury Secretary Tim Geithner told CNN late Thursday that the AIG bonus situation was his "responsibility," adding that he didn't know the full details of the bonuses until March 10.Senate Banking Committee chairman Chris Dodd, D-Conn., said he allowed modifications to the Obama stimulus bill's restrictions on executive pay at the request of the Treasury. That became the loophole that allowed the AIG bonuses to be paid.
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Obama also defended Geithner, saying that he is acting "with grace and good humor, and he understands that he's on the hot seat. But I actually think that he's taking the right steps and we're going to have the economy back on the move."
But the chatter grew about how long Geithner will remain in his job. Bloomberg columnist David Reilly suggested Friday that Geithner's days might be number and floated JPMorgan Chase CEO Jamie Dimon as a possible replacement.
If the bank stabilization plan doesn't work, Geithner's days may numbered.
Bank of America knew of Merrill losses
Bank of America Chief Accounting Officer Neil Cotty knew about the $15.3 billion losses at Merrill Lynch and was involved in administering the write-downs that contributed largely to it, The Washington Post reported today.Meanwhile, New York Attorney General Andrew Cuomo has won a court battle to obtain the names of Merrill employees who shared millions of dollars in bonuses as the bank rang up huge losses and received $45 billion in government bailout funds.
Andrew Rosenbaum contributed to this report.
| Fri. | Thur. | Chg. | Month chg. | YTD chg. | |
|---|---|---|---|---|---|
| Treasurys | |||||
| 13-week Treasury bill | 0.200% | 0.190% | 0.010 | -20.00% | 73.91% |
| 5-year Treasury note yield | 1.638% | 1.636% | 0.002 | -18.91% | 5.61% |
| 10-year Treasury note yield | 2.625% | 2.597% | 0.028 | -13.68% | 16.98% |
| 30-year Treasury bond yield | 3.654% | 3.612% | 0.042 | -1.83% | 35.79% |
| Currencies | |||||
| U.S. Dollar Index | 84.340 | 83.640 | 0.700 | -4.32% | 2.67% |
| British pound in dollars | $1.4447 | $1.4518 | -0.0071 | 0.87% | -1.95% |
| Dollar in British pounds | £0.6922 | £0.6888 | 0.0034 | -0.86% | 1.99% |
| Euro in dollars | $1.3583 | $1.3674 | -0.0091 | 7.12% | -3.04% |
| Dollar in euros | € 0.7362 | € 0.7313 | 0.0049 | -6.64% | 3.14% |
| Dollar in yen | 95.77 | 94.50 | 1.27 | -1.89% | 5.65% |
| Canadian dollar in U.S. dollars | $0.806 | $0.808 | -$0.0015 | 2.63% | -1.43% |
| U.S. dollar in Canadian dollars | $1.241 | $1.238 | $0.0033 | -2.56% | 1.46% |
| Commodities | |||||
| Gold | $956.20 | $958.80 | -$2.60 | 1.45% | 8.13% |
| Copper | $1.7960 | $1.8075 | -$0.01 | 16.74% | 27.38% |
| Silver | $13.8400 | $13.5200 | $0.32 | 5.57% | 19.70% |
| Corn | $3.9650 | $3.8825 | $0.08 | 13.04% | -2.58% |
| Crude oil (NYMEX) (per barrel) | $51.06 | $51.61 | -$0.55 | 14.08% | 14.48% |
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