Stocks ended a choppy session sharply lower Tuesday as investors regrouped after the prior session's blockbuster rally.
The Dow Jones Industrial Average dropped 115.65, or 1.5 percent, to close at 7,660.21. The S&P 500 shed 2 percent and the Nasdaqlost a whopping 2.5 percent.
Stocks had started the day deep in the red as investors took a breather after Monday's surge. Fears over the health of the world economy resurfaced and investors were looking to lock in some gains after the previous session's jump, which sent all three major indexes up about 7 percent.
An early comeback attempt came and went after a report showed that U.S. home prices rose for the first time in a year. Prices climbed 1.7 percent in January from December, the Federal Housing Finance Agency reported Tuesday. In annual terms, however, prices were down 6.3 percent from January 2008.
Stocks made a second comeback attempt in early afternoon trading as investors were encouraged by confident and prepared testimony on Capitol Hill from Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner.
That attempt also fizzled and stocks tumbled into the closing bell, finishing at session lows, amid sharp selling in financials in that final hour of trading, an old pattern that's recently re-emerged.
AIG shares shed 4.7 percent as lawmakers on Capitol Hill heard testimony from the Treasury Secretary and Fed chief about the intervention with AIG and
how to avoid a debacle like this again.
Geithnerrequested broad new powers
to regulate nonbank financial companies like AIG that are an integral part of the financial system.
Amid the uproar over the AIG bonuses, nine of the 10 executives who received top bonuses have agreed to return them. New York Attorney General Andrew Cuomo said he hopes to recoup $80 million of bonus payments, or about half of the $165 million paid by the giant insurer.
General Electric finished flat after Deutsche Bank gave the conglomerate and CNBC parent a vote of confidence, saying it believes GE can support its troubled finance unit GE Capital through the end of 2010.
Bank stocks gave back some of Monday's massive gains, with Citigroup down 3.5 percent and Bank of America down 7.1 percent after both gained more than 20 percent in the previous session.
The chairman of the Dow Jones Index oversight committee said if there were a reverse stock split in Citigroup shares it would decrease its chances of being dropped from the Dow.
Meanwhile, Bank of America is losing two Merrill Lynch executivesfollowing its takeover of Merrill three months ago. North American economist David Rosenberg and chief investment strategist Richard Bernstein are leaving Banc of America Securities Merrill Lynch. Rosenberg is going back to his native Toronto to work for an unnamed buy-side firm. Bernstein is also looking for opportunities on the buy side, as well as teaching and writing.
And Goldman Sachs is said to be in talks to sell some of its 4.9 percent stake in Industrial & Commercial Bank of China, according to the Wall Street Journal, in a move that could raise more than $1 billion, according to people close to the talks.
Goldman shares fell 1.2 percent.
Across the pond, Switzerland's second-largest bank, Credit Suisse, said it has had a strong start to 2009 and reiterated it was poised to benefit from a market upswing when this happened.
Germany's Deutsche Bank also expects it will return to profit this year if the global economy, financial markets and the regulatory environment develop as expected, according to the bank's Chief Executive Josef Ackermann.
But worries emerged over the effects of the Treasury's plan to clean up toxic assets from the banking sector, with Nobel Prize-winning economist Joseph Stiglitz saying it is unlikely to work as long as the economy remains weak and that it would "rob" the US taxpayers.
The government is using the taxpayer to guarantee against downside risk on the value of the toxic assets, while giving the potential profits to private investors, Stiglitz told Reuters.
In addition, the recession may stretch well into next year, probably raising the need for another fiscal stimulus package at least as large as the first one, prominent economist Martin Feldstein said.
And in the latest twists in the case of jailed swindler Bernard Madoff, a court-appointed trustee has located more than $1 billion of his assets, his house in France could be seized and American prosecutors are cooperating with a British agency that investigates organized crime.
Technology stocks, which have rallied hard since early March, were among the hardest hit today. Amazon fell 3.9 percent, Microsoft lost 2.5 percent and Intel shed 3 percent.
Shares of Ford Motor skidded 2.4 percent as the automaker said it would institute a 3.75 percent price hike on all its models in the United Kingdom.
And Disney shares fell 3.3 percent after Goldman cut its rating on the stock to "neutral" from "buy," saying the stock trades at a higher premium to its peers and that the company's results were likely to be hurt by a weak performance from its studio-entertainment division, which includes film and video.
Shares of Calvin Klein parent Phillips-Van Heusen jumped 14 percent after Citigroup raised its rating on the stock to "buy" from "hold," saying the company's cost-cutting efforts and restructuring may help it deliver earnings at the top end of its range.
Trading was brisk, with about 1.65 billion shares changing hands on the New York Stock Exchange. Decliners outpaced advancers roughly 2 to 1.
Still to Come:
WEDNESDAY: Weekly mortgage applications; durable-goods orders; new-home sales; weekly crude inventories; Fed's Pianalto and Yellen speak
THURSDAY: Final GDP; Weekly jobless claims; new-home sales; earnings from Best Buy, GameStop; Geithner to unveil plan for overhauling the financial system; Fed's Lockhart, Fisher, Lacker and Stern speak
FRIDAY: Personal income/spending; Consumer confidence