Declines extended as markets weigh bailout plan

Financial markets extended their declines today as investors worried that politicians were beginning to doubt the necessity of a broad government bailout for financial institutions as a way to revive ailing credit markets.

Top economic officials updating Congress about efforts to work out a $700bn (€477bn) financial rescue plan faced a greater degree of second-guessing from lawmakers than some investors had expected. The Dow Jones industrials, which had been higher for the first half of the session ended at the lows of the day, tacking losses onto a steep drop Monday.

According to preliminary calculations, the Dow fell 161.52, or 1.47%, to 10,854.17 after having risen more than 125 points in the early going and then falling by more than 180. With Monday’s 370-point decline, the blue chips are down 534 points, or 4.69%, for the week.

Broader stock indicators also fell today. The Standard & Poor’s 500 index fell 18.87, or 1.56%, to 1,188.22, and the Nasdaq composite index fell 25.67, or 1.18%, to 2,153.34.

Still, trading appeared more orderly than Monday, when investors rushed into hard assets like oil and gold. Meanwhile, demand remained high for three-month Treasury bills, considered the safest short-term financial asset, while the dollar regained some ground after being hard hit Monday.

After days of intense gyrations in financial markets, investors are anxious over whether the plan to absorb bad mortgages and other risky assets will help steer the economy onto more solid footing.

Treasury Secretary Henry Paulson, Federal Reserve chairman Ben Bernanke and Securities and Exchange Commission chairman Christopher Cox testified before lawmakers, who are working with the Bush administration to complete the details of the bailout.

But traders grew nervous as the officials faced questions about whether the government’s planned response was appropriate. Sen. Chuck Schumer, for example, asked whether $150bn (€102bn) might be adequate to get the program started if more money were promised.

The market remains uncertain about how long it will take for the bailout plans to take effect, and when they do, how effective they will be.

“There’s scepticism about whether the $700bn (€477bn) number is the right number,” said Jim Herrick, manager and director of equity trading at Baird & Co.

Bernanke told the Senate Banking Committee that Congress risked triggering a recession if it didn’t act on the plan. He said inaction could leave a range of businesses unable to borrow the money while consumers could find it impossible to finance big purchases like cars and homes.

Financial markets showed uneasiness as investors listened to the testimony, but not the fear and volatility that dominated Monday’s trading.

The market for short-term Treasury bills remained strained. The yield on the three-month T-bill rose to fell to 0.79% from 0.88% on Monday; last week, it was around zero after investors flooded money into T-bills as the credit markets seized up. That spurred the Bush administration to formulate its debt buyout plan.

The yield on the benchmark 10-year Treasury note, which trades opposite its price, fell to 3.82% from 3.85% late Monday.

The dollar, whose decline Monday drove some of the frenetic trading in other markets, was mixed against other major currencies, while gold prices declined after starting the week with a big advance.

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