Wall street falls amid bad debt worries

Stocks pulled back sharply on Wall Street today after major US banks said they would set up a fund to help bail out the credit markets and as oil prices surged to 86 dollars a barrel for the first time.

The Dow Jones industrial average lost more than 100 points.

The stock market’s pullback comes not only amid concerns about bad debts and rising energy costs but as investors await third-quarter reports due this week from more than 80 components of the Standard & Poor’s 500 index.

The concerns about banking came after Citigroup, the biggest US bank, reported that third-quarter results fell 57%. The company said it lost more than 3 billion in mortgage-backed security losses, leveraged debt write-downs and fixed-income trading losses.

The bank, along with JPMorgan Chase & Co and Bank of America, announced the creation of a fund to help revive the asset-backed commercial paper market.

The fund will buy assets from structured investment vehicles, also known as SIVs, which buy corporate bonds and sub-prime mortgage debt. The bailout was orchestrated by the Treasury Department to avoid a fire sale in the market.

“It’s a reminder that this problem never was entirely put to bed. There may be financial institutions out there than are in more trouble than we thought they were,” said Aaron Gurwitz, co-head of portfolio strategy at Lehman Brothers Investment Management, referring to concerns about bad debt. He also noted that today’s session was not unusual given the back-and-forth moves in the major indexes in recent sessions.

The Dow fell 108.28, or 0.77%, to 13,984.80.

Broader stock indicators also declined. The S&P 500 index fell 13.09, or 0.84%, to 1,548.71, and the Nasdaq composite index fell 25.63, or 0.91%, to 2,780.05.

Bonds fell following a better-than-expected economic regional economic reading in New York. The yield on the benchmark 10-year Treasury note rose to 4.68% from 4.65% on Friday. The dollar was mixed against most other major currencies, while gold prices rose.

Light, sweet crude rose to record levels, crossing 85 per barrel for the first time and rising as high as 86.22 in trading. Oil settled up 2.44 at 86.13 per barrel on the New York Mercantile Exchange as after the Organisation of Petroleum Exporting Countries said crude production by countries that are not Opec members is probably falling despite rising demand.

The week’s economic calendar is light, putting more of the focus on quarterly results. Today, the New York Empire State Index, a regional economic indicator published by the Federal Reserve Bank of New York, came in better than expected for October. The index rose to 28.75 from September’s 14.70.

Investors are keeping tabs on corporate and economic data as they try to determine how well corporate profits will fare.

“All those guys are tempering their expectations because the economy is slowing,” said Thomas Nyheim, vice president and portfolio manager at Christiana Bank & Trust, referring to Wall Street’s estimation for moderate growth in third-quarter profits.

The concerns over soured loans drew comments from Treasury Secretary Henry Paulson, who said in a speech today that the troubles with SIVs might require regulators to step in to stave off future problems.

Wall Street’s unease today followed a period of calm after worries about the credit markets roiled markets around the world over the summer. During August and into September, investors were concerned that mortgages made to borrowers with poor credit that had been bundled together and sold off as investments would resurface and cause widespread losses.

Indeed, some hedge funds and other investment vehicles worldwide that held sub-prime debt succumbed to the soured loans. It was not until the Fed stepped in with reductions in short-term interest rates and the rates it charges to loan to banks that the credit markets began to show signs of recovery.

Citigroup fell 1.63, or 3.4%, to 46.24 after the bank raised its loan-loss provisions by 2.24 billion – a higher amount than it estimated a week ago - amid expectations of further deterioration in consumer credit. The bank also said it would delay repurchases of its shares.

Medtronic fell 6.33, or 11%, to 50 after the medical device maker said it had suspended sales of its Sprint Fidelis defibrillation leads because of risk they could break.

Biogen Idec jumped 13.08, or 19%, to 82.51 after the company said it may sell itself and that it has drawn interest from potential buyers.

Declining issues outnumbered advancers by about 8 to 3 on the New York Stock Exchange, where volume totalled 1.29 billion shares compared with 1.06 billion shares traded on Friday.

The Russell 2000 index of smaller companies fell 11.81, or 1.40%, to 829.36.