U.S. Stocks Take Afternoon Bath

Updated from 2:07 p.m. EDT

Stocks on Wall Street turned from sharply green to decisively red Tuesday after the Treasury Department outlined a plan to invest $250 billion in U.S. banks.

The Dow Jones Industrial Average, up more than 400 points earlier, was lately down 186 points at 9201, and the S&P 500 was lower by 19.8 points at 983. The Nasdaq was giving back 64 points at 1780.

Ahead of Tuesday's session, Treasury Secretary Henry Paulson said his agency would dedicate $250 billion of the $700 billion bailout package to buying equity positions in U.S. banks.

Of that $250 billion, the government would use about $125 billion to buy preferred shares in Goldman Sachs ( GS), Morgan Stanley ( MS), JPMorgan Chase ( JPM) , Bank of America ( BAC), Merrill Lynch ( MER) , Citigroup ( C), Wells Fargo ( WFC), Bank of New York Mellon ( BK) and State Street ( STT), The Wall Street Journal reported.

Speaking in Washington Tuesday morning, Paulson said he dislikes government ownership in U.S. financial firms but the equity investment will help unfreeze liquidity markets and alleviate the crisis. Paulson stressed that the capital infusions should be circulated rather than kept by banks.

Federal Reserve Chairman Ben Bernanke praised Paulson's plan, and FDIC Chair Sheila Bair said that additional insurance of deposits in banks would also boost confidence in the financial system.

Action in the money markets suggests the international relief effort may be gaining traction against the credit crunch. Bloomberg reported that three-month dollar Libor, a measure of the rate banks charge one another for large loans, declined 12 basis points to 4.64%. The overnight rate lost 29 basis points to 2.18%.

"We don't want to sound too Pollyanna-ish, but it is clear from the events of the past week that the body politic of the developed economies has been shaken to the core and will now do whatever is necessary to maintain the operation of the system. The daily threat of institutional failure has, therefore, now receded greatly," wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics, in an email.

Shepherdson also wrote that owners of equities will still suffer as a result of the financial crisis. "The gigantic loss of wealth will reverberate throughout the real economy for years to come, though the biggest hit will come in the near term," he wrote. He said that the consumer still poses a large downside risk for the U.S. economy.

Goldman Sachs was undertaking some of its own maneuvers, seeking a New York state charter for its new banking subsidiary. Goldman, along with Morgan Stanley, became a bank holding company on Sept. 21. Many major commercial banks apply for charters from federal rather than state regulators.

Elsewhere in the financials, Hank Greenberg, former CEO of AIG ( AIG), was preparing a proposal to keep the company from being taken over by the government. AIG is rushing to pay back a bridge loan from the government to avoid being seized.

Spanish bank Banco Santander ( STD), meanwhile, confirmed it was expanding on its existing stake to buy the entirety of Sovereign Bancorp ( SOV) for $1.9 billion.

"The market is finding a bottom. It's finding one. Whether Thursday/Friday was the bottom or whether we're going to see another bottom on Wednesday, it really doesn't matter," said Jason Pride, director of research at Haverford Investments. He said the market has experienced a great deal of the downside and is now beginning to resolve itself. "That doesn't mean we're going to propel into the next great market immediately ... but it means that we're working things out now."

There isn't another shoe to drop because of the broader economy, said Pride. He said that recent turmoil in the markets was accounting for the economic impact of the credit crisis. He said some areas of the market, including lower-tier financials, could continue to suffer. "But we're in the process of fixing things and moving out of it," he said.

In the technology space, Internet concerns Yahoo! ( YHOO) and Google ( GOOG) were working with the Justice Department to try to stave off an antitrust case against a proposed ad-sharing deal between the two companies.

In other legal news, Discover Financial ( DFS) settled an antitrust lawsuit against MasterCard ( MA) and Visa ( V). Shares of Discover were rising on the news.

Meanwhile, Boeing ( BA) looked headed for trouble as negotiations with its machinist union broke down. Boeing's machinists have been on strike for five weeks.

As for corporate earnings, consumer-products developer Johnson & Johnson reported third-quarter earnings that rose year over year and topped estimates.

PepsiCo wasn't as rosy, announcing it would reduce its workforce and reporting falling profit.

In the realm of commodities, crude oil shed $2.56 to close at $78.63 a barrel. Gold was unchanged at $839.50 an ounce.

Longer-dated U.S. Treasury securities were declining in price. The 10-year note was down 10/32, yielding 4.02%. The 30-year was losing 2-3/32 to yield 4.26%. The dollar was rallying vs. the yen but falling against the euro and pound.

Abroad, European indices including the FTSE in London and the DAX in Germany were trading higher. Looking at Asian markets , Japan's Nikkei closed 14.2% higher, a one-day record, and Hong Kong's Hang Seng closed with gains.

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