Market's Late Decline Spares Big Banks

News at a Glance

• Red Light: Stocks stumble in afternoon trading.
• Direct Deposit: Bush details bank investment plan.
• Enthusiasm Overseas: Bulls lift Europe, Asia.
• Search for Justice: Google, Yahoo in antitrust talks.

The Lowdown

A government plan to prop up banks with direct investments was not enough to sustain the enthusiasm on Wall Street.

A day after a broad rally cut last week's losses in half, the major indexes reversed course as traders turned bearish despite a new federal commitment to the financial system. The Dow Jones Industrial Average gave back early gains to finish a volatile session down 77 points at 9311. The Nasdaq dropped 65 to 1779, and the S&P 500 gave up 5 at 998.

Banks performed well after President Bush unveiled a four-point plan to begin salvaging the nation's banks and restoring faith in the credit markets. The most critical point is a direct investment in the nation's banks. The Treasury will dedicate $250 billion of the $700 billion rescue package approved by Congress to buy up equity in troubled financial institutions.

"This is an essential short-term measure to ensure the viability of America's banking system," the president said in prepared remarks. "And the program is carefully designed to encourage banks to buy these shares back from the government when the markets stabilize and they can raise capital from private investors."

The plan calls for the Treasury to buy $25 billion worth of preferred stock in JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC); $10 billion stakes in Goldman Sachs (GS) and Morgan Stanley (MS); and additional shares of other financial institutions.

Treasury Secratary Henry Paulson said the purpose of the equity purchases was to keep the credit markets liquid. "At a time when events naturally make even the most daring investors more risk-averse, the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it," he said in prepared remarks.

The plan also includes temporary FDIC guarantees on new debt issued by insured banks, expanded FDIC insurance on non-interest bearing accounts and the promise of a plan from the Federal Reserve to become a buyer of commercial paper.

Companies outside the financial sector appeared less impressed by the plan. Losses in tech, for example, weighed on the Nasdsaq. Microsoft (MSFT), Oracle (ORCL) and Dell (DELL) lost ground. Search titans Google (GOOG) and Yahoo (YHOO) also slipped.

Consumer staples also turned red. PepsiCo (PEP) took a dive after posting a 9.6% decline in third-quarter net income and announcing job cuts. Coca-Cola (KO) and Philip Morris International (PM) dipped, too.

Earlier, traders had welcomed more gains overseas. In Asia, Japan's Nikkei surged 14.2%, while Hong Kong's Hang Seng climbed 3.2%. In Europe, the benchmark indexes of London, Paris and Frankfurt each ended the day up more than 2.5%.

Crude oil futures lost ground as the broader market slipped. Shortly before 4 p.m., crude traded down $1.06 on the day at $79.31 a barrel.

Gold prices were fairly flat at $839.20 an ounce.

Corporate News

• Boeing (BA) and the International Association of Machinists and Aerospace Workers broke off a second round of labor talks without reaching an agreement, the firm said. The union, which represents 27,000 striking employees in Kansas, Oregon and Washington, would not agree to Boeing's request to cut its payroll by 2,000 jobs.
• The Merck (MRK) painkiller Vioxx, which was pulled from the shelves four years ago for increasing the risk of cardiovascular events, creates an early but transient danger to patients taking the drug, Reuters reported, citing the results of a three-year study. The results of the study, which are published in this week's issue of Lancet, suggest that the onset of the increased risk can vary across patients but that it dissipates a year after terminating treatment.
• Google (GOOG) and Yahoo (YHOO) are negotiating with Justice Department officials to avoid an antitrust hurdle to an advertising partnership between the two Internet giants, The Wall Street Journal reported. Under the proposed deal, Yahoo would display ads sold by Google. Some advertisers argue the collaboration would effectively raise prices on ads by reducing options.

The Economy

• The Bush administration is scheduled to release its monthly budget statement for September on Tuesday at 2 p.m.

ReadMe

• BusinessWeek on the Treasury's $250 billion investment: By acquiring various stakes in the nation's banks simultaneously, the government will prevent any one bank from appearing much worse off than the others. STORY
• The New Yorker on the Federal Reserve: The Fed's decision to buy up commercial paper supports to its new reputation as an increasingly accessible lender. STORY
• Slate on the bailout auction: Here is a suggestion for how to value banks' mortgage-backed securities. STORY

WatchMe

• Bloomberg on handicapping the recession: Brian Redican, senior economist at Macquarie Group, says the global economic slump could last another six months. VIDEO
• CNBC on the pervasiveness of the slowdown: Shane Oliver, head of investment strategy & chief economist at AMP Capital Investors, says a global recession is inevitable, regardless of recent activity to keep the economy moving and the world's banks afloat. VIDEO
• The Nuclear Option: A look at the risks and benefits of nuclear power. CNBC, 9 p.m.