Updated from 12:51 p.m. EDT
Stocks on Wall Street dropped sharply Tuesday afternoon as investors digested more testimony from Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson on the government's historic bailout of the U.S. financial markets. Bernanke's warnings that the economy may slip into recession prompted some pessimism in the jittery market.
The Dow Jones Industrial Average was down 99 points to 10,916, and the S&P 500 lost 14 points to 1194. The Nasdaq dropped 18 points to 2161.
On Monday, stocks suffered as traders attempted to assess the impact of Paulson's sweeping bailout of financial firms. Paulson's $700 billion plan would create a government institution to buy from banks the bad debt at the core of the credit crisis.Although the plan is a welcome boon to many investment firms with hard-to-value securities on their balance sheets, fear remains that the massive government-spending increase will drive up interest rates and weaken the dollar as new government debt floods the market. Speaking before the Senate Banking Committee Tuesday, Paulson emphasized the fragility of the financial system and said that last week's market turmoil spread into other segments of the economy. He also said that regulatory reform is needed, but that providing an immediate response to the financial crisis is critical. Bernanke agreed that swiftly dealing with the current crisis should take priority. Bernanke also said that failure to get a bailout package through Congress raises the chances of a recession. He said that without the bailout, businesses would stagnate, unemployment would rise, and the auto and housing markets would continue to suffer.