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Stocks Plunge Ahead of Bailout Vote

Mike Taylor

Stocks on Wall Street took a plunge Monday as traders awaited action by Congress on government support for the financial sector and assessed Citigroup's (C Quote) government-assisted purchase of Wachovia (WB Quote).

The Dow Jones Industrial Average dropped 272 points to 10,871, and the S&P 500 lost 40 points to 1173. The Nasdaq plummeted 89 points to 2095.

Friday, the three major indices started in negative territory but finished at session highs after President Bush said Treasury Secretary Henry Paulson's proposed $700 billion aid package for the financial system would soon pass through Congress. Traders also were contending with the failure of Washington Mutual (WM Quote) and its subsequent sale to JPMorgan Chase (JPM Quote).

Over the weekend, Congress was finalizing the bailout proposal. A report from the Associated Press indicated that the House of Representatives would vote on the bill Monday, and the Senate would follow suit later in the week.

The FDIC announced early Monday that Citigroup was buying the senior and subordinated debt as well as banking operations of Wachovia, in a deal facilitated by the Federal Deposit Insurance Corp. The FDIC said that Wachovia did not fail. Shares of Wachovia fell from Friday's closing price of $10 to 94 cents.

"Boy oh boy has the landscape changed," said Hugh Johnson, chief investment officer at Johnson Illington Advisors. By his count, only five major players are left in the financial space: Goldman Sachs (GS Quote), JPMorgan, Morgan Stanley (MS Quote), Bank of America (BAC Quote) and Citigroup. "I never would have guessed that."

Johnson said that the spate of consolidation among financial firms is "going to usher in a whole mess of problems, concentration of power being among them. It's only five guys that have to sit down and figure they can rule the world." He said it would be interesting to see whom the Treasury's bailout package helps and what price it pays for troubled assets. "You can bet it's going to be watched carefully," he said.

Meanwhile, Morgan Stanley got a $9 billion investment from Japanese bank Mitsubishi UFJ.

A report in The Wall Street Journal said that private equity companies Bain Capital and Hellman & Friedman were in the hunt to buy the Neuberger Berman arm of bankrupt brokerage Lehman Brothers.

The Financial Times reported that insurance firm AIG (AIG Quote) was contemplating the sale of 15 of its businesses to repay an $85 billion bridge loan from the Federal Reserve and keep from being taken over by the government.

The credit crisis was also causing turmoil overseas. European governments early Monday arranged rescues of Bradford & Bingley, Fortis and Hypo Real Estate.

Johnson said it's worrisome that the financial crisis is being transmitted to other parts of the world. He said that the globalization of the turmoil means lenders of last resort will now have to coordinate internationally.

Looking at the day's earnings, electronics retailer Circuit City (CC Quote) reported a wider second-quarter loss and withdrew its previous 2009 earnings forecast.

Pharmacy chain Walgreen (WAG Quote), meanwhile, reported profit that rose 13% year over year on strong revenue.

In the pharmaceutical sector, ImClone (IMCL Quote) was still in talks to sell itself to a large drugmaker following a hostile takeout bid from Bristol-Myers Squibb (BMY Quote).

As for economic data, the Department of Commerce said that in August, personal incomes rose 0.3%, up from a 0.7% decrease in July and above economists' estimates. Personal spending was flat in August, falling short of analyst predictions of 0.2% growth.

In the commodities space, the price of crude oil was declining $6.54 to $100.35 a barrel, and gold was gaining $15.10 to $903.60 an ounce.

Longer-dated U.S. Treasury securities were rising in price as investors sought safety from the credit crisis. The 10-year note was up 1-19/32 to yield 3.66%, and the 30-year was gaining 2-24/32, yielding 4.21%. The dollar was rising sharply against the euro and pound but falling vs. the yen.

Overseas exchanges, including the FTSE in London and the Dax in Frankfurt, were taking losses. Asian indices such as the Nikkei in Japan and the Hang Seng in Hong Kong closed on the downside.