Stocks bounced back Thursday after ratings agency Standard & Poor's said it sees an end in sight to the flood of write-downs and details of a proposed housing-rescue plan emerged.
The Dow Jones Industrial Average posted a triple-digit point loss for the first hour and a half of trading as news of an imminent collapse of hedge fund Carlyle Capital and the dollar's drop to a 12-year low against the yen rattled the market. But the blue-chip index got a double shot in the arm from the S&P's optimistic remarks and the housing plan.
A pullback in crude-oil prices and a slight recovery in the dollar, also improved the market's mood. Earlier, oil topped $111 a barrel and the dollar fell below 100 yen against the Japanese currency, a 12-year low.
S&P said subprime-mortgage write-downs could hit $285 billion but there is an end in sight for big financial institutions, in a report issued Thursday.
Meanwhile, U.S. House Financial Services Committee Chairman Barney Frank is proposing a rescue plan for the mortgage and housing markets. The program would allow the Federal Housing Authority to provide up to $300 billion in new guarantees to help refinance at-risk borrowers into viable mortgages.
Earlier, the market was rattled by the dollar's drop below 100 yen -- a 12-year low -- and news that Carlyle Capital is on the brink of collapse. Lenders to the Netherlands-listed hedge fund, an affiliate of U.S. buyout firm Carlyle Group, have begun to force the sale of Carlyle's assets as the unit has missed margin calls and is now in default on about $16.6 billion of its loans and expects to default on the rest.
Among the lenders that have begun to sell Carlyle assets are J.P. Morgan , Merrill Lynch and Bear Stearns .
Bear Stearns shares has it own share of problems this week, with rumors circulating about liquidity problems at the brokerage. The company has come out and said there aren't any such problems, but investors don't seem to be convinced. The news Thursday is that, now, even hedge funds and other traders are are nervous about entering into long-term trades with the bank, requiring supervisor approval for any dealings with Bear Stearns.
The Carlyle news was particularly unsettling as it means the credit crunch has moved beyond subprime. Carlyle Capital has mostly AAA-rated mortgage-backed securities issued by Fannie Mae and Freddie Mac in its portfolio.
Financials led the decline, with the S&P financial index, the biggest decliner among 10 key S&P sector indexes, down about 2 percent. Financial stocks, including Citigroup and Bank of America , accounted for four of the top five decliners on the Dow.
Forecast Slams GM Stock
Auto stocks skidded after a brokerage slashed its outlook for major U.S. auto makers.
The Dow's top decliner was General Motors , after Morgan Stanley said it now expects the top U.S. auto maker to post a loss for 2008. The brokerage also widened its loss estimate for No. 3 Ford .
AIG was the second biggest decliner on the Dow amid concerns that the world's largest insurer could suffer larger-than-expected losses from its credit-derivatives portfolio, which has already led to $11 billion in write-downs.
Treasury Secretary Henry Paulson said he and top policy makers are calling for an overhaul of rules for credit markets and mortgage brokers.
"The objective here is to get the balance right -- regulation needs to catch up with innovation and help restore investors confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it," Paulson, who heads the panel, said in a speech to the New York Press Club in Washington this morning.
In economic news, retail sales unexpectedly fell 0.6 percent in February, while jobless claims held steady at 353,000. U.S. import prices rose by 0.2 percent, less than expected, last month. Business inventories rose 0.8 percent, more than expected, in January, though sales posted their biggest increase in almost a year.
The converging burdens on the market served as notice that this week's aggressive move by the Federal Reserve to add liquidity to the credit market may not be sufficient to save Wall Street from further pain.
Ambac Keeps Top Ratings; EA Offer Turns Hostile
Shares of Ambac skidded even as the bond insurer kept its top rating from Moody's and S&P after raising $1.5 billion in capital.
Washington Mutual bucked the downward trend after a British hedge fund offered to participate in a consortium to recapitalize the bank.
In the tech sector, Electronic Arts' effort to acquire Take-Two Interactive Software has turned hostile, with EA launching a tender offer for its rival at $26 a share. Take-Two, publisher of the popular "Grand Theft Auto" video game, last month rejected EA's $2 billion unsolicited all-cash offer.
Target shares slipped. After the closing bell Wednesday, the discount retailer said it is in talks to sell half of its credit-card receivables business.
Elsewhere in retail, shares of Men's Warehouse rebounded from an earlier decline after the chain beat earnings expectations, but issued an earnings outlook of 20 to 24 cents a share, well below the expected 44 cents a share.
Some analysts have suggested the retail sector may already be in a recession.
"It certainly feels like a recession," Men's Warehouse CEO George Zimmer said.
Airline stocks also bounced back after earlier turbulence. Rumors suggest that major airlines will begin paring their flight schedules due soaring jet-fuel prices and weak demand for air travel.
American parent AMRrallied with the sector, though United and Northwest remained lower.
-- Bob Pisani contributed to this report.
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