U.S. Stocks Surrender Early Gains

After an upside start, stocks in New York retreat following news the U.S. Treasury may take equity positions in U.S. banks.
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Updated from 9:39 a.m. EDT

Stocks in New York quickly retreated from early gains Thursday, following a report that the Treasury Department may take equity positions in U.S. banks. Tight credit markets were weighing on investor enthusiasm even as tech got a boost from

IBM's

(IBM) - Get Report

solid third-quarter earnings.

The

Dow Jones Industrial Average

was recently down 80 points to 9178. It was one year ago today that the Dow closed at an all-time record high of 14,164. The

S&P 500

was losing 13 points to 972. The

Nasdaq

was better by 10 points at 151.

On Wednesday, stocks traded chaotically before closing with losses after the

Federal Reserve

and central banks from other countries issued a coordinated cut in interest rates to alleviate the credit crunch.

As the new session got underway, credit markets continued to tighten despite the rate cuts. Three-month Libor, a measure of the rate banks charge one another for large loans, was up 43 basis points to 4.75%. Overnight Libor was up 1.16 percentage points to 5.09%.

Commercial paper wasn't faring much better. The Fed reported that the market for company debt declined by $56.4 billion to $1.55 trillion for the week ended Oct. 8. Paper issued by financial institutions was down $42.4 billion to $641 billion, the Fed said.

Meanwhile,

The New York Times

reported that the

Treasury

may take ownership positions in U.S. banks to improve confidence in the financial system. The U.K. has pursued a similar plan by taking partial national ownership in

Royal Bank of Scotland

(RBS) - Get Report

and

Barclays

(BCS) - Get Report

.

Bloomberg

reported that

BlackRock

(BLK) - Get Report

and

Pimco

, a unit of

Allianz

(AZ)

, had both proposed to

manage mortgage-backed securities

to be bought by the Treasury as part of its $700 billion financial-sector rescue plan.

Separately, the Fed said it would grant insurance company

AIG

(AIG) - Get Report

up to $37.8 billion in exchange for fixed-income securities. The cash infusion comes on top of the $85 billion already lent out in September to keep the company from going bankrupt.

Among other insurers,

MetLife

(MET) - Get Report

has recently discussed a potential merger with

Hartford Financial

(HIG) - Get Report

, according to a report in

The Wall Street Journal

. The report said the discussions didn't lead to a deal, but that they indicate the strain the credit crunch has exacted from insurance firms.

Elsewhere, the

Journal

reported that

National City

(NCC)

was in discussions with other banks, perhaps

PNC Bank

(PNC) - Get Report

or

Bank of Nova Scotia

(BNS) - Get Report

about potentially selling itself.

Financial stocks are again likely to hold the spotlight today as a three-week ban on short-selling of stocks in the sector lifted just before midnight. The

Securities and Exchange Commission

had implemented the rule on Sept. 19 as an emergency measure to help stem massive selling in bank stocks.

Morgan Stanley

(MS) - Get Report

shares were selling off hard, down 21%, and

Goldman Sachs

(GS) - Get Report

was lately lower by 3%.

Looking at corporate earnings, Dow component

IBM preannounced

its third-quarter results, saying it made a profit that increased year over year and topped analyst estimates.

As for economic data, initial jobless claims for the week ended Oct. 4 came in at 478,000, down from 498,000 the previous week but slightly above economists' estimates for 475,000 jobs lost.

In commodities, crude oil was losing $1.10 at $87.85 a barrel. Gold was declining $14.80 to $891.70 an ounce.

Longer-dated U.S. Treasury securities were declining. The 10-year note was down 30/32 to yield 3.75%, and the 30-year was down 26/32, yielding 4.09%. The dollar was gaining ground on its major foreign competitors.

Overseas, European indices, such as the FTSE in London and the DAX in Frankfurt, were mostly higher. Asia was mixed, as the Nikkei in Japan closed on the downside while the Hang Seng in Hong Kong finished with gains.