Rescue falters; feds seize WaMu

By Charley Blaine and Elizabeth Strott

Stocks are likely to open sharply lower Friday after a deal to rescue the nation's financial system fell apart in Congress.

The worry will be elevated because, late today, federal regulators seized troubled Washington Mutual (WM, news, msgs), which had been the nation's largest savings and loan, with more than $300 billion in assets. WaMu's failure is the largest in U.S. history.

At the same time, tech stocks will be pressured after mobile-phone maker Research In Motion (RIMM, news, msgs) offered disappointing profit guidance. Research In Motion shares slumped 19% to $78.60 in after-hours trading.

The news totally reversed good feelings investors might have had earlier reports that an outline of a rescue plan for the financial system had won approval from Democrats and Republicans.

The Dow Jones industrials had closed up 197 points, or 1.8%, to 11,022. The Nasdaq Composite Index gained 31 points, 1.4%, to 2,187, and the Standard & Poor's 500 Index added 23 points, 2%, to 1,209.

The rally, which was broad and deep, was the biggest for the stock market in more than a week and came as crude oil in New York closed up $2.29, or 2.2%, to $108.02 a barrel.

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Futures trading tonight suggested that the Dow will open around 125 points lower to about 10,900. The S&P 500 was looking at opening at 1,194, and the Nasdaq-100 Index ($NDX.X) may start 23 points lower at about 1,674.

Mortgage crisis kills WaMu

WaMu's closing came after the market closed, with the stock down 25% to $1.69.

It represents the demise of what once was the largest U.S. thrift but came to symbolize many of the worst excesses of the mortgage boom. Regulators said WaMu has suffered an exodus of $16.7 billion in deposits since Sept. 15, leaving the Seattle savings bank "with insufficient liquidity to meet its obligations."

JPMorgan Chase (JPM, news, msgs) will pay $1.9 billion to acquire Washington Mutual's deposits and most of its branches, as well as other operations. JPMorgan will also sell $8 billion in common stock to raise its capital position.

The deal isn't expected to result in any hit to the Federal Deposit Insurance Corp.'s bank-insurance fund, The Wall Street Journal said. But it's likely that another arm of government would have to pick up the tab. Some analysts have worried that a WaMu failure could cost more than $20 billion.

With mortgage losses mounting, and its stock price plunging, WaMu has been scrambling over the past month to find a solution; last week it put itself on the auction block. JPMorgan was looking at the bank -- and had been for months. Citigroup (C, news, msgs) and Wells Fargo (WFC, news, msgs), Spain's Banco Santander and Toronto-Dominion Bank (TD, news, msgs) of Canada also had looked at taking WaMu over.

WaMu had 5,400 branches in 23 states; JPMorgan expects to close about 10% of the total.

Energy prices -- New York close

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$108.02	$105.73	$2.29	-6.44%	12.54%
Heating oil (per gallon)	$3.0258	$3.0133	$0.0125	-4.91%	14.21%
Natural gas (per million BTU)	$7.7240	$7.6790	$0.0450	-2.76%	3.22%
Unleaded gasoline (per gallon)	$2.6973	$2.5947	$0.1026	-10.39%	8.29%

Financial rescue deal gets derailed

A meeting among President Bush, Sens. Barack Obama and John McCain and members of the Senate and House produced no decisions, and Sen. Richard Shelby, R-Ala., the ranking Republican on the Senate Banking Committee, came out of the meeting and flatly said there was no deal.

Shelby has been a consistent opponent of the rescue plan, as have a number of conservative Republicans in the House and Senate. In addition, as The New York Times noted, the plan is deeply unpopular among voters.

• Video: Sen. Shelby opposes the bailout

"My hope is that we can get a deal," said Sen. Christopher Dodd, chairman of the Senate Banking Committee, hours after House and Senate negotiators had announced that an accord was at hand. Bush had hoped that an agreement could be announced after the late-afternoon meeting.

The late complications, Dodd grumbled, were making the episode sound more like "a rescue plan" for McCain's presidential bid than one for the financial system.

• Top Stocks blog: Jim Cramer says Paulson is a terrible salesman

While senators declined to offer details of the plan, The Wall Street Journal said the plan that looked like it would win approval apparently included these elements:

• Money would be made available in phases, starting with $250 billion, so that the officials in charge of the plan could see what actual needs are.

• There would be limits on executive pay in situations where the government puts a large amount of money into a failing institution.

• In some cases, the government could receive warrants that would give it the right to acquire shares in the company. This idea may not sit well with Wall Street.

• There would be beefed-up oversight through the Government Accountability Office, an investigative arm of Congress.

Likely not included is a controversial idea to let judges alter the terms of mortgages during bankruptcy proceedings.

Research In Motion shares take a dive

Here's why Research in Motion shares tanked this afternoon after rising nearly 1% to $97.53 in regular Nasdaq trading:

For its third quarter, RIMM said it expects earnings to be between 89 and 97 cents a share, lighter than analysts had expected, Reuters said. It also expects to add 2.9 million subscribers and a gross margin of 47%.

"This is a surprise, and not a positive one," Canaccord Adams analyst Peter Misek said.

The worry is that RIMM expects to spend heavily to roll out sleeker versions of its devices to the mass market, analysts told The Wall Street Journal.

RIMM earned $495.5 million, or 86 cents a share, in the quarter that ended on Aug. 30, up from $287.7 million, or 50 cents, a year earlier. The results were in line with the company's June forecast and just shy of analyst expectations for a profit of 87 cents a share, Reuters said.

The Research In Motion news may hit technology shares generally on Friday. Apple (AAPL, news, msgs), which had risen 2.5% to $131.93 in regular trading, was down 3.9% to $126.81 after hours.

A rally built on dreams of a deal

Today's rally was not built on economic fundamentals but on hopes that the financial rescue plan might be approved as early as this weekend.

The rally was good to financial, energy, utility and technology stocks. The only losers appeared to be metals and materials stocks. Gold and silver both fell today.

JPMorgan Chase was the top-performing Dow stock, up 7.3% to $43.46.

Morgan Stanley (MS, news, msgs) jumped 9.3% to $27.10. Goldman Sachs (GS, news, msgs) rose 1.9%, to $135.50, and Citigroup gained 2.3% to $19.39.

Twenty-four of the 30 Dow stocks showed gains, along with 395 S&P 500 stocks and 70 of the stocks in the Nasdaq-100, which closed up 26 points, or 1.6%, to 1,688. Apple, Qualcomm (QCOM, news, msgs), up 2.8% to $46.54, and Microsoft (MSFT, news, msgs), up 3.5% to $26.61, were responsible for nearly 11 points of the gain for the index. (Microsoft is the publisher of MSN Money.)

GE cuts forecast

Fears about the foundation of the nation's financial system translated into bad news from General Electric (GE, news, msgs) this morning.

But the stock moved higher because of today's rally. GE closed at $25.68, up 4.4%.

The company lowered its third-quarter earnings estimate to between 43 and 48 cents per share, down from a previous forecast of between 50 and 54 cents per share, citing "unprecedented weakness and volatility in the financial-services markets." The consensus estimate among analysts was for 52 cents for the quarter.

For the full year, GE now expects to earn between $1.95 and $2.10 per share, down from a previous estimate of $2.20 to $2.30.

While most people may think of light bulbs and appliances when they think of GE, the company also runs a huge financial business, GE Capital. That business has been hit hard by the credit crunch and the mortgage-market mess.

GE, a Dow component, said it is taking steps to "strengthen its already strong capital and liquidity position" at GE Capital. The company will boost capital for that business by cutting GE Capital's dividend payment to the parent company to 10% of the subsidiary's earnings, down from 40%. GE also said it is suspending its $15 billion stock-buyback program.

GE did say that it will keep its own quarterly dividend to stockholders at 31 cents per share through the end of next year. The company also reaffirmed its commitment to keeping its AAA credit rating.

A trio of dismal economic reports

Worries about what will happen to the economy if a rescue plan does not move forward were highlighted this morning with three weak economic reports.

The housing slump has been the root of the mess that has been plaguing Wall Street and Main Street over the past year, and this morning, a report on new-home sales didn't give much hope for improvement.

Sales of new homes fell 11.5% in August to a 460,000 pace, the lowest level since January 1991, the Commerce Department reported this morning. Economists had been expecting a 505,000 annualized pace. Sales were down 34.5% last month compared to August 2007.

New-home sales reached a high in July 2005 of 1.389 million.

Inventories fell 4.4%, to 408,000, the 16th straight month that inventories have dropped. The August sales pace puts inventories at a 10.9-month supply.

Nonetheless, homebuilding stocks were higher. Lennar (LEN, news, msgs) rose 1.5% to $14.99. Ryland (RYL, news, msgs) jumped 5.7% to $26.70. The Philadelphia Housing Sector Index ($HGX.X) was up 2.9% to $135.94.

The number of U.S. weekly initial jobless claims rose by 32,000 last week to 493,000, the highest level in seven years, the Labor Department reported this morning.

The number of continuing claims remained at 3.54 million for the week ending Sept. 13, which is a five-year high.

"The spike in jobless claims suggests that the U.S. economy has entered a dark period, which is likely to be marked by increased joblessness," Miller Tabak Asset Management Chairman Tony Creszenzi wrote in a note to clients this morning.

And orders for durable goods fell 4.5% in August, the Commerce Department reported, because of weak demand. Excluding transportation equipment, orders declined 3% last month.

Durable goods are big items that are made to last at least three years.

Short hits from the markets -- New York close

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	0.710%	0.440%	0.270	-57.99%	-77.39%
5-year Treasury note yield	3.042%	2.889%	0.153	-1.52%	-11.95%
10-year Treasury note yield	3.862%	3.771%	0.091	1.29%	-4.29%
30-year Treasury bond yield	4.414%	4.378%	0.036	0.05%	-1.01%
Currencies
U.S. Dollar Index	77.100	76.880	0.220	-0.52%	0.53%
British pound in dollars	$1.8392	$1.8471	-0.0078	0.97%	-7.54%
Dollar in British pounds	£0.5437	£0.5414	0.0023	-0.97%	8.16%
Euro in dollars	$1.4631	$1.4620	0.0011	-0.29%	0.10%
Dollar in euros	€ 0.6835	€ 0.6840	-0.0005	0.29%	-0.10%
Dollar in yen	106.39	106.15	0.24	-2.19%	-4.88%
Canadian dollar in U.S. dollars	$0.968	$0.963	$0.0046	2.91%	-2.53%
U.S. dollar in Canadian dollars	$1.034	$1.038	-$0.0041	-2.82%	2.61%
Commodities
Gold	$882.00	$895.00	-$13.00	5.60%	5.25%
Copper	$3.1345	$3.1065	$0.03	-7.45%	3.07%
Silver	$13.2750	$13.4400	-$0.16	-3.15%	-11.03%
Corn	$5.5825	$5.5825	-$0.05	-1.76%	22.56%
Crude oil (NYMEX) (per barrel)	$108.02	$105.73	$2.29	-6.44%	12.54%