Stock Rally Fizzles on Bank Warnings

Stocks reversed a huge rally and closed with modest gains as dour forecasts from three big banks overshadowed a Federal Reserve plan to ease the global credit crunch.

The markets soared at the open after the Fed announced plans to provide more liquidity to the banking system in coordination with other central banks.

But the market turned south in the afternoon after Bank of America,Wachovia and PNC Financial Services Group warned of fourth-quarter write-downs and loan losses.

That revived worries that credit problems are likely to persist despite central bank efforts to contain the crisis. After plunging as much as 90 points, the Dow Jones Industrial Average ended up about 41 points for the day.

"The market doesn't think that the Fed has done enough and this is their indication," said Neil Wolfson, of Wilmington Trust. "It was their indication yesterday that the Fed didn't do enough by cutting 25 (basis points) and they don't think the intervention is enough."

There also was bad news from government-sponsored student loan lender Sallie Mae , which lowered earnings estimates and said previously discussed merger talks had collapsed.

Citigroup named Vikram Pandit, the head of its investment banking business, as its chief executive officer. Pandit has the tough task of restoring the bank's profitability and reputation after missteps in lending and investing caused billion of dollars in losses. Citi was the biggest drag on the Dow as Morgan Stanley predicted trouble ahead for the financial giant. (To watch a CNBC interview this morning with Pandit, go here.)

Bank of America said it expects its fourth-quarter results to be disappointing, citing expected write-downs and lower trading revenue.

Oil soared above $93 after Goldman Sachs sharply raised its outlook for crude prices next year, offsetting concerns over a flagging US economy. Treasurys tumbled following the Fed announcement.

Moving the Market

In corporate news, Another of the largest losers among bluechips was Boeing , which tumbled on fresh doubts over the company's 787 Dreamliner jets.

AT&T shares surged, extending their rally a day after the top US phone company announced its biggest-ever dividend increase and a share buyback program worth nearly $16 billion. The company was the biggest gainer among Dow components.

Home builders also were among those that gave back early gains. Hovnanian , Lennar and Pulte faded through the day as real estate continues to search for a bottom. Before the bell, the Mortgage Bankers Association reported that mortgage applications rose last week to the highest level since July 2005 despite a jump in borrowing costs, but analysts attributed much the activity to people looking to refinance applying at multiple institutions.

General Electric said it expects its profit to rise "at least" 10 percent in 2008 to $2.42 per share, led by gains in its infrastructure business. But the rise was below analysts' forecasts and GE's shares fell on Monday. (GE is the parent company of CNBC.)

Other tech shares moved sharply upward, with one of the biggest gainers being Nextest Systems , which soared after Teradyne