Bailout blues: Dow off 373; oil up 16%

By Charley Blaine and Elizabeth Strott

Stocks gave up all of their gains from Friday as crude oil had its biggest one-day rally ever and uncertainty grew about the government's plan to rescue the nation's financial system.

Crude jumped partly because the dollar tumbled and sent commodity prices higher; gold closed at $909 an ounce, up $44.30 from Friday.

The dollar fell 2% against the euro, its biggest one-day fall ever, on unease about whether the $700 billion rescue plan championed by Treasury Secretary Hank Paulson would work. There was also concern about how fast and in what form a plan might emerge from Congress.

Senate and House Democratic leaders said late today that the bill will likely include more oversight of the program and a requirement that the government do more to help troubled borrowers refinance their mortgages. But Republican opposition appears to be growing.

At the close, the Dow Jones industrials were down 373 points, or 3.3%, to 11,016. The Standard & Poor's 500 Index was down 48 points, or 3.8%, to 1,207, and the Nasdaq Composite Index slumped 95 points, or 4.2%, to 2,186.

A number of analysts suggested that stocks sold off because no one believes the plan will stave off a recession. "We still have a debt-laden U.S. consumer facing falling employment,'' Jeffrey Coons of Manning & Napier Advisors in Fairport, N.Y., told Bloomberg News.

Investors will likely focus on the Paulson plan's progress on Tuesday. There are no major economic reports until Wednesday. The one earnings report that may generate interest will be homebuilder Lennar (LEN, news, msgs).

The Dow and S&P losses were their fourth-worst one-day point losses of the year and third-worst percentage losses. The Nasdaq's loss was its fourth worst point loss of the year and second-worst percentage loss.

In other words, a new world order on Wall Street had a terrible opening day.

The financial landscape has been utterly transformed as the credit crunch and the housing slump took their toll on investment banks and brokerages.

Lehman Bros. (LEH, news, msgs) went bankrupt. Merrill Lynch (MER, news, msgs) agreed to sell out to Bank of America (BAC, news, msgs).

And Sunday, Goldman Sachs (GS, news, msgs) and Morgan Stanley (MS, news, msgs) transformed themselves into bank-holding companies. That will let them form banks -- or buy banks -- and take deposits.

The Dow had jumped 410 points on Thursday and 368 points on Friday in the biggest two-day rally since March 2000 as traders cheered the possibility of a rescue plan. With today's sell-off, the Dow is off 22.2% from its record closing high of 14,165 on Oct. 9, 2007. The S&P 500 is down 22.9% from its closing high, also on Oct. 9. The Nasdaq is off 23.8% from its closing high.

Energy prices -- New York close

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$120.92	$104.55	$16.37	4.73%	25.98%
Heating oil (per gallon)	$3.0430	$2.8978	$0.1452	-4.37%	14.86%
Natural gas (per million BTU)	$7.6580	$7.5310	$0.1270	-3.59%	2.34%
Unleaded gasoline (per gallon)	$2.7038	$2.5997	$0.1041	-10.17%	8.55%

Crude jumps as traders are squeezed

Crude oil closed up 15.7% to $120.92. Gold jumped 5.1% to $909 an ounce in New York. Crude rallied because many traders, who had expected crude prices to continue falling, scrambled to buy back short positions before the October contract expired at the end of trading today.

Prices shot up because competitors who crude contracts to sell were demanding ever-higher prices.

Crude for delivery in November also was higher today, but the gain was a far more modest $6.62 a barrel to $109.37. The November contract will be what investors watch going forward.

Gold stocks were the only group of stocks was able to buck the selling pressure today. The Amex Gold BUGS Index ($HUI.X) was up 9.4% to 354. Newmont Mining (NEM, news, msgs), a major gold producer, jumped 6.2% to $44.43.

• Bailout: Flashback to the 1930s?

Hard to find any winners

Only two of the 30 Dow stocks were higher today -- Microsoft (MSFT, news, msgs), up 1% to $25.40, and Alcoa (AA, news, msgs). Microsoft moved higher announcing it would buy back $40 billion in common stock and boost its dividend 18% to 13 cents a share.

Kraft Foods (KFT, news, msgs), which replaced American International Group (AIG, news, msgs) in the Dow today, was down 4.6% to $33.09.

AIG was the top stock among the 33 gainers among S&P 500 stocks. The insurance giant was up up 22.7% to $4.72. The Federal Reserve agreed last week to lend up to $85 billion to AIG while it tries to restructure its business.

Since bottoming on an intraday basis on Tuesday at $1.25, the stock has jumped 277.6%.

Microsoft and Millicom International Cellular (MICC, news, msgs) were the only gainers in the Nasdaq-100 Index ($NDX.X), which fell 79 points, or 4.5%, to 1,666.

Tech stocks overall slumped badly because of fears that a weakening economy would cut into sales. Apple (AAPL, news, msgs) fell 7% to $131.05; the stock is down 33.8% this year. Google (GOOG, news, msgs) fell 4.2% to $430.14. Cisco Systems (CSCO, news, msgs) was off 4.9% to $23.11.

Watch the money market funds

There were continuing worries today about money market funds after the Financial Times reported that U.S. money market funds suffered an estimated $197 billion of net outflows last week as confidence in their safe-haven status weakened after one fund “broke the buck” and others closed.

The outflows mark a new and potentially dangerous phase for the $3.4 trillion money market fund industry as continued redemptions could result in forced selling of their securities into illiquid bond markets.

Some money market fund operators are facing the prospect of either closing funds to halt redemptions or engineering more costly bailouts of their funds.

Financials sink despite Goldman, Morgan moves

Goldman Sachs was down 7% to $120.78. Morgan Stanley finished down 0.4% to $27.09. Morgan did get some good news: Japan's Mitsubishi UFJ Financial Group said today that it will buy 10% to 20% of the company for $8.4 billion.

• Get free, real-time stock quotes on MSN Money

As commercial bank-holding companies, Goldman Sachs and Morgan Stanley will be regulated by the Federal Reserve instead of the Securities and Exchange Commission. (Their banks, assuming they are nationally chartered, will be regulated by the Comptroller of the Currency.)

And they expect to gather in billion in deposits that might qualify for federal insurance.

As important, neither company may be subject to so-called "mark to market" rules.

These forced broker-dealers or big finance companies like Citigroup with with big broker-dealer operations to mark all their assets to market values once a quarter. Critics have charged that the rules can distort markets, especially if a company is forced to sell assets at fire-sale prices -- at, say, 10 cents on the dollar.

The shift is part of the biggest reordering of Wall Street since the Great Depression. "The decision marks the end of Wall Street as we have known it," William Isaac, former chairman of the Federal Deposit Insurance Corp., told Bloomberg News.

• Talk back: Are botched rescues killing markets?

Talks between Morgan Stanley and Wachovia (WB, news, msgs) are on hold as a result of the status change, according to published reports. Wachovia was down 11.5% to $16.60.

Financial stocks were generally lower, however. JPMorgan Chase (JPM, news, msgs) was down 13.3% to $40.80 -- and was the worst Dow performer on the day. Wells Fargo (WFC, news, msgs) was down 11.6% to $35.18. Citigroup (C, news, msgs) was down 3.1% to $20.01.

Washington Mutual (WM, news, msgs), which is still trying to sell itself, was off 21.7% to $3.33.

Microsoft, HP are buying back shares

Microsoft shares moved higher after the tech giant announced a $40 billion share-buyback program.

Microsoft, a Dow component, also said it is increasing its quarterly dividend by 18% to 13 cents per share. (Microsoft is the publisher of MSN Money.)

And, for the first time, the company will sell up to $2 billion in commercial paper -- short-term IOUs. It may also sell as much as $6 billion in debt.

The moves are designed to give the stock a boost. The stock is down 28.7% this year and has been largely stagnant since tech stocks topped out in early 2000.

"They've been seeing some pressure from investors to use more of their cash for buybacks," analyst Donovan Gow of American Technology Research told Bloomberg News. "They're not seeing a lot of really attractive acquisitions, particularly following the Yahoo (YHOO, news, msgs) debacle." Microsoft tried and failed to buy Yahoo earlier this year.

Hewlett-Packard (HPQ, news, msgs) also said it could buy back up to $80 billion worth of its shares. But shares were down 2.3% to $47.16.

More companies added to short-sale list

The SEC added a number of companies to the short-sale temporary ban list on Sunday.

The regulatory agency added 90 companies, including American Express (AXP, news, msgs), General Electric (GE, news, msgs) and General Motors (GM, news, msgs).

The move did little for the stocks. American Express was down 7.7% to $37.29; GM fell 11.5% to $11.58.

The SEC instituted the ban last week after much criticism that short-sellers drove financial companies' stocks to near-disaster.

"The shorting rules gave investors the belief the world is not coming to an end," Phil Orlando, chief equity strategist at Federated Investors, told Bloomberg News on Friday. "You had a lot of the hedge funds ganging up on these financial companies and putting them out of business."

Earlier last week, the SEC banned naked short-selling -- the trading that occurs when a trader sells shares he may not have and buys them back later. It differs from classic short-selling, in which a trader borrows shares from a broker and sells them, hoping they'll move lower and certifying that he can deliver the shares. He profits by buying shares back at that lower price and then returning them to the broker.

Separately, the Treasury said it will limit its $50 billion plan to guarantee money market funds to people who held such funds as of the close of business on Sept. 19, when Paulson's rescue plan was announced.

Lehman sells brokerage business to Barclay's

A bankruptcy judge approved the sale of Lehman Bros.' broker-dealer business to British bank Barclays (BCS, news, msgs) this weekend. The $1.29 billion deal will save 10,000 jobs.

Lehman's holding company was forced to file for bankruptcy protection last Monday, after Barclays and Bank of America bailed on talks to buy the entire company.

Barclays will buy Lehman's businesses in investment banking, fixed income and equity sales, and research and trading, along with the company's headquarters building in midtown Manhattan and two data centers in New Jersey. The deal is a bargain for Barclay's; initial estimates suggested the business might sell for as much as $1.75 billion.

Japanese financial-services company Nomura will buy Lehman's Asian assets.

Meanwhile, Lehman Bros. International wants $8 billion back from the U.S. division.

The British Lehman unit wants to use the money to finance continuing operations.

GM to draw down line of credit

The credit crunch that has roiled the markets is taking a toll on General Motors.

The company late Friday said it will draw down the remaining $3.5 billion of a $4.5 billion secured revolving-credit facility to boost its liquidity amid "challenging" times in the capital markets.

GM said a portion of the funds will be used to settle $750 million in debt that will mature in October and to pay $1.2 billion to Delphi Corp. as part of its reorganization.

"This is not something we expected they would need to do until next year," Mirk Mikelic, senior portfolio manager at Fifth Third Asset Management, told Bloomberg News.

GM used $1 billion from the credit line earlier this year.

GM reported a $15.5 billion loss for the second quarter of this year and said it had $20.5 billion in cash at the time.

Short hits from the markets -- 4 p.m.

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	0.875%	0.920%	-0.045	-48.22%	-72.13%
5-year Treasury note yield	3.037%	2.993%	0.044	-1.68%	-12.10%
10-year Treasury note yield	3.826%	3.769%	0.057	0.34%	-5.18%
30-year Treasury bond yield	4.407%	4.366%	0.041	-0.11%	-1.17%
Currencies
U.S. Dollar Index	76.375	77.940	-1.565	-1.45%	-0.42%
British pound in dollars	$1.8594	$1.8342	0.0252	2.08%	-6.53%
Dollar in British pounds	£0.5378	£0.5452	-0.0074	-2.04%	6.98%
Euro in dollars	$1.4821	$1.4499	0.0322	1.01%	1.41%
Dollar in euros	€ 0.6747	€ 0.6897	-0.0150	-1.00%	-1.39%
Dollar in yen	105.39	106.86	-1.47	-3.11%	-5.78%
Canadian dollar in U.S. dollars	$0.969	$0.955	$0.0141	3.00%	-2.44%
U.S. dollar in Canadian dollars	$1.033	$1.048	-$0.0143	-2.90%	2.52%
Commodities
Gold	$909.00	$864.70	$44.30	8.84%	8.47%
Copper	$3.2550	$3.1765	$0.08	-3.90%	7.04%
Silver	$13.4500	$12.4750	$0.98	-1.87%	-9.85%
Corn	$5.5850	$5.5850	$0.16	-1.72%	22.61%
Crude oil (NYMEX) (per barrel)	$120.92	$104.55	$16.37	4.73%	25.98%