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Dow finishes down after Buffett-Goldman deal

Tension grew in the financial markets, sending stocks mostly lower as investors worried about the effectiveness of a government plan to rescue banks from crippling debt.
/ Source: The Associated Press

Tension grew in the financial markets Wednesday, sending most stocks moderately lower as investors worried about the effectiveness of a still-emerging government plan to rescue banks from crippling debt. The credit markets also showed added strain, with demand rising for short-term Treasury bills, considered the safest of investments.

Wall Street was calmer than during the first two days of this week, with stocks meandering in and out of positive territory while investors tried to determine what s hape the $700 billion plan might take. But the atmosphere was uneasy enough to erode the market’s initial enthusiasm over investor Warren Buffett’s decision to invest $5 billion in Goldman Sachs Group Inc.

Investors focused on broader concerns that the dealmaking in Washington could produce less potent medicine than proponents say is necessary to aid moribund credit markets. Fear about bad debt on the books of financial companies has led to tightness in credit markets. That, in turn, has made it harder and more expensive for businesses and consumers to borrow.

Treasury Secretary Henry Paulson told the House Financial Services Committee that he agreed to limit the pay of Wall Street executives whose companies might benefit from the proposed measure.

Paulson appeared with Federal Reserve Chairman Ben Bernanke before Congress for a second day to brief lawmakers. Their appearance on Capitol Hill Tuesday unnerved investors, who began questioning whether lawmakers were doubting the necessity and form of the government bailout.

The waiting was clearly wearing on the credit markets, raising concerns again about liquidity in the banking system.

Demand for short-term government Treasuries increased as investors again sought safe places to keep cash. The yield on the 3-month Treasury bill, considered the safest short-term financial asset, was at 0.49 percent late Wednesday, down from 0.79 percent late Tuesday. Last week, demand spiked so high that the yield briefly dipped into negative territory; investors were so focused on putting their money in safe assets that they have been willing to accept small and at times even negative returns.

In other Treasury trading, the yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.81 percent from 3.80 percent late Tuesday.

“I think you’re seeing a lot of tough talk from politicians who don’t want to seem like they’re rolling over for Wall Street and, normally, people would see that for what it is. But right now investors are exceptionally nervous,” said Stephen Massocca, co-chief executive of Pacific Growth Equities in San Francisco.

The Dow Jones industrial average fell 29.00, or 0.27 percent, to 10,825.17. The decline leaves the Dow down more than 560 points, or about 5 percent, for the week.

Broader stock indicators were mixed. The Standard & Poor’s 500 index slipped 2.35, or 0.20 percent, to 1,185.87, and the Nasdaq composite index rose 2.35, or 0.11 percent, to 2,155.68.

The dollar, whose struggles earlier this week contributed to extreme volatility in other markets, was mixed. Meanwhile, gold prices rose.

Light, sweet crude for November delivery fell 88 cents to settle at $105.73 a barrel on the New York Mercantile Exchange.

“I think the quiet in the market is essentially the collective breath being held by investors and unfortunately they can’t hold their breath forever,” said Jack Ablin, chief investment officer of Harris Private Bank in Chicago. “We need Congress to do something.”

Shares of Goldman Sachs Group Inc. rose $4.95, or 4 percent, to $130 Wednesday after Buffett’s Berkshire Hathaway Inc. said late Tuesday it was investing at least $5 billion in Goldman — a move Wall Street took as a sign of support for the independent investment bank model. Besides buying $5 billion in preferred stock, Berkshire also got warrants to buy another $5 billion in Goldman’s common stock.

Goldman also said it will sell $5 billion worth of common stock to the public; the company and Morgan Stanley earlier this week were granted approval to become bank holding companies, which would help them strengthen their balance sheets.

Beyond Goldman, investors put money into defensive areas like health care and utilities. Merck & Co. rose 72 cents, or 2.3 percent, to $31.47, while CenterPoint Energy Inc. rose 29 cents, or 2 percent, to $14.53.

Investors appeared unfazed by a larger-than-expected drop in sales of existing homes in August as their focus remained on the bailout. The National Association of Realtors said sales fell by 2.2 percent; sales had been expected to fall by 1.6 percent, according to economists surveyed by Thomson/IFR. The number of unsold homes on the market dropped by 7 percent from a record set in July, marking the steepest drop in inventory since December 2006.

Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where consolidated volume came to a relatively light 4.66 billion shares, compared with 5.11 billion traded Tuesday.

The Russell 2000 index of smaller companies fell 11.42, or 1.61 percent, to 697.77.

Overseas, Japan’s Nikkei stock average rose 0.20 percent. Britain’s FTSE 100 fell 0.79 percent, Germany’s DAX index fell 0.26 percent, and France’s CAC-40 fell 0.61 percent.