Stocks Plunge Again As Paulson Says Gov't Won't Buy Toxic Mortgages

Stocks Plunge Again As Paulson Says Gov't Won't Buy Toxic Mortgages

[link to www.nbclosangeles.com]

Dow falls 400 on dismal economic news.

By SARA LEPRO

Updated 1:19 PM PST, Wed, Nov 12, 2008

Wall Street remained weary Wednesday, disheartened by more signs of economic stress — including dismal reports from major retailers, a bleak outlook for the nation's auto industry and additional job cuts in the already beaten-down financial sector. News that the government won't buy banks' soured mortgage assets as originally planned further discouraged investors. The Dow Jones industrials fell over 400 points, and all the major indexes dropped more than 4 percent as the market retreated for a third straight session.

Investors sent stocks lower on Monday and Tuesday on concerns that a severe pullback in consumer spending will exacerbate the weakened economy. Remarks from Treasury Secretary Henry Paulson on Wednesday, however, underscored the anxiety that remains about the health of the financial system. After being down in early trading, stocks plunged further following his speech.

Paulson said the government's $700 billion financial rescue package won't purchase troubled assets from banks after all. He said that plan would have taken too much time, and that the Treasury instead will rely on buying stakes in banks and encouraging them to resume more normal lending.

While the market had been pleased by the government's decision weeks ago to buy banks' stock, investors still hoped to see the financial industry relieved of the burden of the mortgage assets whose decline in value helped set off the nation's financial crisis.

Meanwhile, retailers like Macy's Inc. and Best Buy Co. showed signs of strain from a cash-strapped public, and Morgan Stanley outlined plans to slash more jobs. Concerns about the future of the top U.S. automakers, which analysts believe teeter on the brink of bankruptcy, also weighed on the market.

"The news is continuously negative," said Peter Cardillo, chief market economist at Avalon Partners.

Analysts believe the market is in the process of retesting the intraday low hit on Oct. 10, when the blue chips dipped below the 8,000 mark.

"We're just going through the typical process of testing and retesting," said Matt King, chief investment officer of Bell Investment Advisors. "If we can continue to build higher and higher lows, that's definitely a positive. If the Dow can build a base above 8,100 and bounce off that, we see that as a definite technical positive."

By close, the Dow shed 411.30, or 4.73 percent, to 8,282.66.

The broader Standard & Poor's 500 index dropped 46.63, or 5.19 percent, to 852.32, and the Nasdaq composite index stumbled 81.69, or 5.17 percent, to 1,499.21.

Though Paulson's announcement marks a major shift in the original bailout plan and seemed to rattle investors, Wall Street analysts generally believe that the Treasury is now on the right path.

"That's really what they should have done originally," said King. "First and foremost, we have to make sure banks are going to survive and then we can worry about lending. This is the quickest and most efficient way to do that."

"Buying bad assets doesn't do that," he said.