Financials Lead Selloff as Worries Persist

Financials led a market selloff as investors worried that the bailout of Fannie Mae and Freddie Mac might not be enough to prevent further turmoil in financial markets.

The Dow Jones Industrial Average shot up 120 points out of the gate and Fannie and Freddie jumped by more than 20 percent, but by noon, the gains had vanished and all three were lower.

All three major indexes, including the S&P 500 and Nasdaq, remained in bear-market territory, more than 20 percent below their October highs.

The U.S. Treasury and Federal Reserve announced late Sunday a plan to rescue Fannie Mae and Freddie Mac in order to boost confidence in the troubled mortgage-finance giants and stave off a meltdown in the market.

Under terms of the plan, Fannie Mae and Freddie Mac will be allowed to borrow directly from the Fed's emergency-lending discount window as regular banks do.

The news had initially calmed market jitters but it quickly became apparent that investors weren't convinced.

The Fed's rescue of Fannie and Freddie "was an important policy step but the reason for the bailout combined with the closing of IndyMac suggests that there is more bad news to come," said Alan Gayle, senior investment strategist for RidgeWorth Capital Management. "It seems like the news just keeps on coming," he said. "Some investors may just be throwing up their hands."

The Office of Thrift Supervision (OTS) shuttered the $32 billion IndyMac, headquartered in Pasadena, Calif., on Friday and a successor institution, IndyMac Federal Bank, will open for business today.

Analysts say more banks may follow in IndyMac's footsteps as credit losses once concentrated in subprime mortgages spread to other home loans and debt once thought safe.

(Which bank could be next? Click on the video at left.)

National City pared its loss slightly when the stock resumed trading, but quickly slipped back toward a 30-percent decline as investors seemed unconvinced by the bank's statement that it isn't experiencing any unusual depositor or creditor activity.

The selloff in financials is similar to the fall off the cliff techs took after the tech bubble burst in 2000, said Citigroup chief strategist Tobias Levkovich.

"Indeed, it seems as if any trade into financial names has been the equivalent of catching falling knives, irrespective of historical valuation, sentiment or earnings revision guideposts. Investors with longer term investment time horizons should not bail out now," Levkovich said in a note to clients.

Fannie and Freddie shares experienced a 20-percent pop at the open but the gains quickly evaporated as Wall Street wondered if the bailout would be enough. The stocks had plunged more than 40 percent last week amid fears that the firms, which own or back $5 trillion of debt, accounting for nearly half of the value of all U.S. mortgages, were undercapitalized.

Both Merrill Lynch and Citigroup slashed their price targets on the pair: Merrill cut Fannie to $9 and Freddie to $7, while Citigroup lowered Fannie to $21 and Freddie to $16.

The bailout could put more pressure on the U.S. dollar and analysts said an intervention to prop it up could come soon.

Merrill Lynch CEO John Thain is considering selling other investments to drum up capital, not just Merrill’s stakes in financial-information powerhouse Bloomberg and money manager BlackRock , CNBC has learned. Merrill, which reports earnings on Thursday, is expected to post a hefty loss and writedowns that could top $6 billion.

Technology stocks had initially opened higher but quickly retreated as Yahoo and Google dragged on the sector.

This just in: Yahoo has rejected Microsoft 's offer AGAIN.

Yahoo Chairman Roy Bostock called the latest offer from Microsoft and billionaire investor Carl Icahn "ludicrous," setting the stage for a showdown at Yahoo's annual shareholder meeting on Aug. 1.

Of course, Wall Street is watching how this shakes out for Google , but Google is a little busy at the moment, defending and defining its position on YouTube user identity in a lawsuit brought by Viacom , parent of MTV and Comedy Central.

Apple , meanwhile, bobbed higher in the sea of red in the tech sector, as the company announced that it sold one million units of its new 3G iPhone in its debut weekend.

There are a slew of tech earnings on tap this week, including Intel on Tuesday, eBay