Stocks end mixed as investors await bailout

The credit markets showed added strain Wednesday and stocks mostly fell as investors worried about the effectiveness of a still-emerging government plan to rescue banks from crippling debt.

Despite an atmosphere of uneasiness, Wall Street was calmer than during the first two days of this week, with stocks meandering in and out of positive territory as investors waited to learn the fate of the government’s $700-billion bailout proposal.

Some investors worried that legislative deal-making in Washington could produce less potent medicine than proponents say is necessary to aid moribund credit markets.

Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke appeared before Congress for a second day to brief lawmakers, who Tuesday were questioning the necessity and form of the government bailout.

The waiting was clearly wearing on the credit markets, raising concerns again about liquidity in the banking system.

Investors seeking a haven in short-term government securities sent their yields plunging. The yield on the three-month Treasury bill fell to 0.46% from 0.72% late Tuesday. Last week, demand for the three-month bill rose so high that its yield dipped into negative territory.

The benchmark 10-year T-note rose to 3.81% late Wednesday from 3.8% late Tuesday.

“I think you’re seeing a lot of tough talk from politicians who don’t want to seem like they’re rolling over for Wall Street, and normally people would see that for what it is. But right now investors are exceptionally nervous,” said Stephen Massocca, co-chief executive of Pacific Growth Equities in San Francisco.

The Dow Jones industrial average fell 29.00 points, or 0.3%, to 10,825.17. In the last three days, the blue-chip index has lost more than 560 points, or about 5%.

Broader stock indicators were mixed. The Standard & Poor’s 500 index slipped 2.35 points, or 0.2%, to 1,185.87, and the Nasdaq composite index rose 2.35 points, or 0.1%, to 2,155.68.

The Russell 2,000 index of smaller-company stocks fell 11.42 points, or 1.6%, to 697.77.

Declining issues outnumbered advancers by about 4 to 3 on the New York Stock Exchange.

The dollar was mixed after struggling earlier in the week, while gold prices edged up.

Oil futures fell 88 cents to settle at $105.73 a barrel on the New York Mercantile Exchange.

“I think the quiet in the market is essentially the collective breath being held by investors, and unfortunately they can’t hold their breath forever,” said Jack Ablin, chief investment officer of Harris Private Bank in Chicago. “We need Congress to do something.”

Shares of Goldman Sachs Group jumped $4.95, or 4%, to $130 after Warren Buffett’s Berkshire Hathaway said late Tuesday that it was investing at least $5 billion in new preferred stock issued by Goldman. The Wall Street firm said it also sold $5 billion of common stock to the public.

Goldman and Morgan Stanley this week were granted approval to become bank holding companies, which would help them strengthen their balance sheets. Morgan Stanley fell $3.21, or 11%, on Wednesday to $24.79 on word that the firm’s merger talks with Wachovia had ended.

American International Group fell $1.69 to $3.31. The insurer said it would accept the Federal Reserve’s $85-billion loan after private-sector financing didn’t come through.

Stocks in defensive sectors such as healthcare and utilities gained ground. Merck rose 72 cents, or 2.3%, to $31.47, while CenterPoint Energy rose 29 cents, or 2%, to $14.53.

Investors appeared unfazed by a larger-than-expected drop in sales of existing homes in August as their focus remained on the bailout. The National Assn. of Realtors said sales fell 2.2%; economists on average had expected a decline of 1.6%. The number of unsold homes on the market dropped 7% from a record set in July, marking the steepest drop in inventory since December 2006.

Overseas, key stock indexes fell 0.8% in Britain, 0.3% in Germany and 0.6% in France. Shares rose 0.2% in Japan.