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Stocks End Lower as Bailout Anxiety Lingers

Published: Tuesday, 23 Sep 2008 | 5:15 PM ET

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By: Cindy Perman
CNBC.com Staff Writer

Stocks fell more than 1 percent amid anxiety about the Wall Street bailout plan. Lowered analyst outlooks dragged on General Electric and bank stocks.

"I think everybody thought [the bailout] was a done deal. And all of a sudden Congress and everybody is talking about it for two days," said Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh. "Markets hate uncertainty — especially now."

Major U.S. Indexes

.DJIA

.NCOMP

.SPX

The Dow Jones Industrial Average lost 161.52, or 1.5 percent, to close at 10854.17. The S&P 500 fell 1.6 percent, while the tech-heavy Nasdaq skidded 1.2 percent.

General Motors [GM Loading... () ] was the top decliner on the Dow, falling 7.4 percent, as the auto maker's plan to draw $3.5 billion from its credit facility is bolting on another component of anxiety for investors worried about the clunky auto giant's ability to maneuver through the brave new world of automobiles.

In an interesting turn, CEO Rick Wagoner took to the YouTube airwaves to convince investors and customers that it will survive. It's part of a series of short videos called "The Case for GM."

General Electric [GE Loading... () ] was among the biggest drags on the Dow and S&P 500. Goldman Sachs slashed its growth forecast for the conglomerate and Merrill Lynch cut its rating on the stock to "neutral" from "buy," amid increasing worries about the company's financial arm, which accounts for 50 percent of its profits. (GE is the parent of CNBC.)

Elsewhere on the Dow, Caterpillar shares [CAT Loading... () ] fell after the firm launched a $1.25 billion two-part debt sale.(Track the Dow winners & losers.)

For Investors

There is also concern that, even if a bailout goes through, maybe it won't be enough to dig us out of the credit crunch.

Oppenheimer analyst Meredith Whitney gave the market an answer to that question it didn't want to hear: The government's bailout plan has "little hope" for improving banks' fundamentals in the near or medium term, Whitney said, slashing her outlook for U.S. banks and projecting more dividend cuts.

Whitney now expects Citigroup [C Loading... () ] to post a loss for the third quarter, widened her projected loss for Wachovia [WB Loading... () ] and cut her earnings estimates for Bank of America [BAC Loading... () ], JPMorgan Chase [JPM Loading... () ] and Wells Fargo [WFC Loading... () ].

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke began an intensive two-day round of congressional hearings to hasten approval of the bailout legislation.

Bernanke was blunt with lawmakers: The U.S. will be at an increased risk for recession if Congress doesn't act on the Bush administration's $700 billion bailout plan.

"The financial markets are in quite fragile condition and I think absent a plan they will get worse," Bernanke said.

Paulson drove home the need to get the plan approved now: "I feel a great urgency. I believe it's got to be done this week or before you leave," Paulson told a Senate panel.

Everyone seemed to agree that a plan needs to be done but there was some stinging criticism from lawmakers.

"What they have sent us is not acceptable," said Sen. Christopher Dodd, chairman of the Senate committee.

Tomorrow, Bernanke and Paulson will testify before the House.

Airline stocks rallied as crude oil [US@CL.1 Loading... () ] came back down to Earth, with the November contract settling at $106.61 a barrel. The October contract expired on Monday, and with a lot of bets against oil, it created a massive short squeeze. Short sellers, who borrow stock betting it will fall only to buy it back at the lower price, were forced to cover their bets before the contract closed. That sent oil to its biggest one-day gain on record, finishing at $120.92 a barrel.

Northwest [NWA Loading... () ] jumped 5.2 percent, while American parent AMR [AMR Loading... () ] gained 3.3 percent.

The dollar clawed back after recording its biggest one-day loss against the euro on Monday. Analysts say uncertainty about the U.S. bailout plan is going to cap the dollar's gains.

Investors got a reminder of the flagging state of the economy as the National Retail Federation forecast holiday sales are to grow at the slowest pace in six years. Consumers are put off from spending by worries over job security, falling house prices and rising inflation.

There was some good news for former Lehman Brothers [LEHMQ Loading... () ] staff, however, as UK bank Barclays reopened several of the collapsed investment bank's former businesses. Lehman's sales and trading businesses are not yet open.

At the same time, the decision by Morgan Stanley and Goldman Sachs [GS Loading... () ] to become holding banks rather than investment banks continued to raise concerns among investors.

In earnings, shares of Lennar [LEN Loading... () ] dropped 7.5 percent even as the homebuilder posted a narrower-than-expected loss.

DuPont [DD Loading... () ] fell 1.5 percent after the chemical maker named Ellen Kullma as its CEO, effective in January. She succeeds Charles O. Holliday, Jr., who helmed the chemical and electronic-materials company for more than 10 years.

Shares of electronics retailer Circuit City [CC Loading... () ] shed 8.8 percent after its CEO resigned amid a fierce proxy battle. The resignation is effective immediately. Board member James Marcum will assume the CEO role on an interim basis.