Watching Wall Street drama

By Madlen Read

Sept. 15, 2008 12 AM PT

The Associated Press

Wall Street enters the new week filled with trepidation about what lies ahead for the financial sector.

Late Sunday, investors were still waiting to learn the fate of foundering Lehman Bros. Holdings, there were reports that Bank of America Corp. and Merrill Lynch & Co. might merge and insurer American International Group appeared on the verge of a huge restructuring.

Meanwhile, U.S. and foreign banks were working on a plan to cushion the global banking system from Lehman’s possible failure, a top investment banking official said on condition of anonymity because the discussions were ongoing.

However all the developments turn out, it was clear that the financial system still had much work to do before it could be considered healthy. And a stock market that has stumbled continually looked to be in for at least a rocky start when trading resumed today. It was also clear that investors’ confidence in financial executives’ ability to clean up their books was still falling.

With that backdrop, some of the biggest financial institutions, including Goldman Sachs and Morgan Stanley, are scheduled to post quarterly results this week.

Goldman and Morgan Stanley are expected to report profit declines amid the continuing problems and losses in the credit markets. Lehman said last week that it would post a hefty loss, and Wall Street is seeking more details.

“Our financial institutions are suffering. I don’t think we’re at the end of the tunnel yet,” said Christian Menegatti, lead analyst for the financial website RGEMonitor.

The stock market has been frenetic lately, as a simple chart of the Dow Jones industrial average’s jagged, back-and-forth moves shows. One moment, investors might be cheering -- as they did last Monday for the Fannie Mae and Freddie Mac takeover.

But the next moment, they are cashing out.

After rising nearly 300 points Monday, falling by that much Tuesday, then seesawing for the rest of the week, the Dow ended the week up 1.8%. The Standard & Poor’s 500 index rose 0.8%, while the Nasdaq composite index rose 0.2%.

The market has plenty of other issues to deal with this week.

The Federal Reserve meets again to discuss monetary policy. The market expects the Fed to stand pat on interest rates when it meets Tuesday. Investors will carefully parse policymakers’ assessment of the economy to see if the central bank’s concerns about inflation have abated.

If they have, market participants might bet that the Fed will keep rates steady well into next year, or perhaps even cut them again before raising them.

Back when oil prices were surging, some investors were anticipating a rate hike by the end of the year. Between the summers of 2007 and 2008, the key federal funds rate was lowered to 2% from 5.25%.

Economic data also could return to the forefront this week, as investors wonder whether consumers are getting some relief from a pullback in fuel prices.

The Labor Department is expected to report a 0.1% increase in consumer prices, according to the median estimate of economists polled by Thomson/IFR. Core consumer prices, which strip out energy and food, are expected to rise 0.2%.

The Commerce Department is expected to report that housing starts fell to 950,000 units in August from 965,000 the previous month.

Other major companies reporting results this week include electronics distributor Best Buy Co., food company General Mills Inc., shipper FedEx Corp. and software maker Oracle Corp.

(BEGIN TEXT OF INFOBOX)

At a glance

Today

Federal Reserve releases industrial production for August.

Weekly Treasury auction.

Tuesday

Labor Department releases consumer price index for August.

Federal Open Market Committee meets.

Treasury Secretary Henry M. Paulson testifies at a Senate Banking, Housing and Urban Affairs Committee hearing on Fannie Mae and Freddie Mac.

House Financial Services subcommittee hearing on proposed changes to the federal law governing the mortgage settlement process.

Quarterly earnings reports due from Adobe Systems, Best Buy, Goldman Sachs Group and Kroger.

Wednesday