Updated from 3:28 p.m. EDT
The U.S. market had an ugly session and closed lower Friday as investors continued to fret about the health of government-sponsored mortgage buyers
Dow Jones Industrial Average
lost 128.48 points, or 1.1%, to 11,100.54, and the
stumbled 13.90 points, or 1.1%, to 1239.49. The
dropped 18.77 points, or 0.8%, to 2239.08.
Earlier, the major averages were down 2% or more owing to worries about Fannie and Freddie, whose shares have been under severe pressure for most of the week. The latest cause for concern was speculation that the federal government would be forced to step in to secure their financial health.
Speaking today in Washington, D.C., Treasury Secretary Henry Paulson said he doesn't foresee a government bailout for Fannie and Freddie. Then a
report said that
Chairman Ben Bernanke told the companies they could borrow money from the discount window if they needed quick funds to shore up their capital.
That briefly erased the market's losses, but the downturn resumed and the indices finished in the red. Reports emerged following the end of trading that in fact no talks were taking place regarding discount-window access by Fannie and Freddie.
Ultimately, Fannie lost 22.4% to $10.25, while Freddie slipped 3.1% to $7.75. Fannie had traded as low as $6.68 and Freddie fell as far as $3.89.
Bond issues for Fannie and Freddie have held up surprisingly well, said Bob Pavlik, chief investment officer at Oaktree Asset Management. He said that while short-term bonds are safer because mortgage borrowers can continue making payments, he sees more trouble for the longer term as foreclosure rates increase.
As for worries about the government's role, Pavlik said that despite Paulson's comments, the Fed and Treasury are probably working behind the scenes to find a solution and that Fannie and Freddie couldn't be allowed to fail. "If there was a big possibility of that happening, you'd see a pullback in the bond market," he said.
Pavlik said investors are concerned that Fannie and Freddie will have to raise additional dilutive capital, and uncertainty is shaking investors. "You're not even getting a true picture on that because
the Office of Federal Housing Enterprise Oversight is telling you one thing while former Fed presidents are telling you something else," he said, referring to Bill Poole's statement earlier this week that Fannie and Freddie are "insolvent."
President Bush, in comments to reporters Friday, said Bernanke was "working very hard" to address the issues plaguing Fannie and Freddie and touted the economic stimulus checks recently sent to taxpayers as having helped retail sales in June. Senate Banking Committee Chairman Chris Dodd said Fannie and Freddie were fundamentally sound, giving the stocks a nudge upward.
The economy, however, remains hampered by high gasoline price, Bush said. He pushed Democratic leaders to open up domestic oil exploration, particularly offshore, in Alaska and in western oil shale.
"One way to deal with supply problems is to increase supply here in America," he said.
Fears about the mortgage insurers were relegating the quarterly report from
and another deal in the chemicals space.to the back burner.
GE posted a quarterly profit of 54 cents a share and
, while revenue climbed 11% to $46.9 billion. GE also said it would sell its Japanese consumer finance business to Shinsei Bank for $5.4 billion.
Also keeping the buyers sidelined was a record high for oil, whose price this week has traversed a wide range. After falling $10 in two days, crude has now rebounded to new record highs, breaking the $147 mark before settling back somewhat to $144.77, up $3.12 a barrel in New York. Gold closed up $18.60 at $960.60.
"The market is tremendously concerned that something can happen over this weekend, and no one wants to be long over this weekend, especially when Israel is practicing bombing runs," said Pavlik. Were there to be further escalations in tensions between Israel and Iran, oil could spike to $170 or more, he said.
For the second time in two days, a deal is taking place in the chemicals sector. A day after
said it would buy
Rohm & Haas
in a pact worth nearly $19 billion, including debt,
for more than $3 billion.
The Wall Street Journal
reported that Belgium's
is lifting its takeover proposal for
by $5 to $70 a share after the U.S.-based maker of Budweiser said it wasn't interested in the early $46 billion offer.
After the market closed yesterday, energy-patch denizen
forecast an encouraging second-quarter profit. The company said that oil production profits would compensate for losses in its refining business.
In the financial sector,
of France offered $7.7 billion for
German retail operations. If regulators clear the agreement, the sale could close in the fourth quarter.
Harried financial firm
, which sank Thursday on rumors that trading partner Pimco was reducing its exposure to Lehman because of liquidity worries. A Pimco spokesman later denied the rumor, but today, Standard & Poors said that Lehman's declining share price hasn't hurt its liquidity levels. Lehman continued to tumble, lately down 16%.
began permitting consumers to buy its highly anticipated 3G iPhone this morning.
CEO Rupert Murdoch said his company is "very unlikely" to involve itself in a deal with Internet company
. Murdoch's remarks dispelled speculation that
had recruited him in an effort to break up Yahoo!. Microsoft had issued a failed bid to buy Yahoo! earlier this year.
Away from stocks, long-dated Treasuries were falling as investors contemplated the government's role in a potential Fannie-Freddie bailout. The 10-year was shedding 1 1/32 in price, yielding 3.92%, and the 30-year was losing 1 22/32 to yield 4.52%. The dollar was losing ground against the yen, euro and pound. The dollar index, which measures the dollar against a basket of foreign currencies, was dropping 0.6% at 72.08.
As for data, the Commerce Department reported that the U.S. trade deficit slimmed by 1.2% in May to $59.8 billion from $60.5 billion in May. Analysts were expecting the deficit to broaden to $62.2 billion.
June U.S. export prices, excluding agriculture, rose 0.9% in June, while import prices, subtracting oil, rose 0.3%, according to the Bureau of Labor Statistics.
The University of Michigan's consumer sentiment index for July registered 56.6, up from a June level of 56.4 and ahead of economists' predictions.
Overseas, action was mixed. Hong Kong's Hang Seng was gaining, while Frankfurt's DAX, London's FTSE and Japan's Nikkei were slipping.