Stocks Skid as Bailout Fails to Sway Investors

Stocks finished lower, led by financials, 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 ended down about 45 points, or 0.4 percent, after surging more than 120 points at the opening bell in a burst of relief over the Fannie-Freddie rescue.

The S&P 500 index shed 0.9 percent and the tech-heavy Nasdaq fell 1.2 percent.

All three major indexes 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 Federal Deposit Insurance Corp seized the $32 billion IndyMac bank, headquartered in Pasadena, Calif., on Friday. The FDIC assured customers that their deposits remained safe and that it would operate IndyMac as a federal bank. It will then probably try to sell it as a whole or in pieces.

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.)

Richard Bove, a bank analyst at Ladenburg Thalmann, said BankUnited Financial of Coral Gables, Fla., was high on his "danger-zone" list, as was Downey Financial .

The regional banks at greatest risk for a dividend cut are Zions Bancorp , Regions Financial and Suntrust Banks , Goldman Sachs analyst Richard Ramsden said. He also cut his price target on Regions Financial to $10 from $22, and, according to theflyonthewall.com, cut Zions Bancorp to "sell" from "neutral."

National City finished down 15 percent, about half of its decline earlier in the session. The stock was briefly halted but when it resumed trading, 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 and the stocks finished down 5.1 percent and 8.3 percent, respectively.

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 up  the U.S. currency 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.

Washington Mutual was the biggest decliner on the S&P 500, tumbling 35 percent.

Bank of America and Citigroup