Stocks on Wall Street End in the Red

The market's early gains are erased as worries about the financial sector continue. Treasuries rise, and oil is little changed.
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Updated from 3:24 p.m. EDT

A

Federal Reserve

and Treasury-sponsored rescue plan for pummeled mortgage buyers

Fannie Mae

and

Freddie Mac

couldn't keep U.S. stocks out of the red Monday, and the major averages closed with moderate losses.

The

Dow Jones Industrial Average

fell 45 points at 11,055, and the

S&P 500

lost 11 points to 1228. The

Nasdaq

dropped 26 points to 2213.

On Sunday, Treasury Secretary Henry Paulson said his

agency would extend additional credit

to Fannie and Freddie, as well as buy stock in the companies, if needed, to help the government-sponsored entities retain adequate capital levels.

Meanwhile, the Fed said it will play a more active role in setting capital requirements for the two mortgage backers and granted its New York branch the power to lend to the companies if necessary.

Last week, shares of Fannie and Freddie were repeatedly hammered on concerns about their solvency and speculation that the government would stage a bailout, destroying the value of their stocks.

A weekly auction of short-term bills by Freddie Mac was met with strong demand today. The company said today it sold $2 billion in three-month bills with a yield of 2.309% and another $1 billion in six-month reference bills that yield 2.496%. Shares of Fannie were recently up 2%, while Freddie was losing 3.4%.

The Treasury and Fed's decision to step in on behalf of the government-sponsored entities is good news, because things might have been worse if the government hadn't intervened, said Bill Stone, senior vice president and chief investment strategist at PNC Wealth Management.

"Some of these people that worry about a systematic failure of the financial system are kind of overstating the case," said Stone. Still, investors have reason to be worried. "The fact remains that even though the systematic risk might not be there, big picture anyway, I'm not sure that things have necessarily gotten any better for shareholders in financials."

Stone pointed out that a decision by the Treasury to buy additional shares of the mortgage insurers would probably be dilutive to the stock, hurting shareholders. "They could survive, but shareholders could still come away with little to nothing."

In a less encouraging development for the financial space, the Office for Thrift Supervision took over

IndyMac

(IMB)

late Friday after a bank run diminished its capital. Shares of IndyMac have lost nearly all their value, ending last week at 28 cents.

Stone said that the IndyMac takeover weighed on sentiment. With IndyMac stock trading under $1 a share since late June, said Stone, "The thing was in bad shape. Their specialty was alt-A loans, more than 50% in California. You couldn't get much closer to the eye of the storm."

He said the failure may weigh on sentiment because of worry that there may be more bad news to come, and traders are probably concerned about holding shares in financials stocks ahead of their upcoming earnings statements.

Reflecting jitters about the financial sector,

National City

(NCC)

shares plunged this morning and stopped trading just before noon. The bank issued a statement to quell rumors that it was facing unusual depositor or creditor activity. Recently the stock was trading down 16%. Shares of fellow financial firm

Washington Mutual

(WM) - Get Report

were also falling substantially, down 34%.

Also disquieting to investors were earnings from regional firm

M&T Bank

(MTB) - Get Report

. The company said second-quarter profits declined 25% year over year to $160.3 million, or $1.44 a share, shy of analysts' forecast of $1.50 a share. M&T was recently dropping 18%.

"There is a great deal of fear as far as how sound these banks are at this point," said Don Frerichs, senior vice president and director of mutual funds for Portfolio Management Consultants, the investment arm of Envestnet Asset Management. He said that the S&P may be fairly valued based on forward earnings, and to the degree that as foreclosure legislation puts a bottom into the housing market, investor sentiment could turn positive.

On Sunday,

Anheuser-Busch

(BUD) - Get Report

accepted a $70-a-share takeout bid by Belgian brewer InBev. The deal, worth $52 billion, represents an increase from InBev's earlier offer of $65 a share.

Elsewhere on the M&A front,

Yahoo!

(YHOO)

said over the weekend that it had rejected a proposal by

Microsoft

(MSFT) - Get Report

and billionaire Carl Icahn to restructure the Internet company and sell its search business to Microsoft.

This morning, disposal company

Waste Management

(WM) - Get Report

also began courtship of

Republic Services

(RSG) - Get Report

, offering $34 a share. Waste Management said its offer is better for Republic shareholders than a June 23 agreement by Republic to acquire

Allied Waste

(AW)

in a stock deal.

In technology,

Apple

(AAPL) - Get Report

announced that it sold 1 million iPhones over the weekend, trouncing analyst sales expectations for the sought-after smartphone.

Looking at commodities, crude oil ended up 12 cents at $145.18 a barrel, and gold rose $13.10 to finish at $973.70.

Prices for crude were little changed in the wake of an announcement from President George Bush that he was lifting the executive order banning oil exploration on the Outer Continental Shelf surrounding the U.S. Speaking at the White House, he said that Congress should act quickly to increase domestic oil production.

As for Treasuries, the 10-year note was adding 22/32 in price, yielding 3.88%, and the 30-year was up 1-6/32 to yield 4.47%. The dollar was retreating against the euro, yen and pound.

Outside the U.S., European markets were rising, while the Asian exchanges showed some weakness. The FTSE in London and the DAX in Frankfurt were both up, though the Nikkei in Japan and Hong Kong's Hang Seng declined.