U.S. Stocks Erase Losses Amid Hopes Of AIG Rescue

NEW YORK (MarketWatch) -- U.S. stocks on Tuesday posted modest gains in afternoon trade as investors pegged hopes on reports the federal government might intervene to prevent a possible collapse of giant insurer American International Group Inc.

"It's the end of the world as we know it. We're now dealing with a problem that is probably much larger than we think. There is $1 trillion of assets in AIG. It's much bigger and much more profound than a broker dealer in New York. It will affect Main Street as well," said Marino Marin, managing director at Gruppo, Levey & Co.

The fear and uncertainty underlying the market will persist until the outcome at AIG is known, rendering the Federal Reserve's pending interest rate decision of little importance, said Marin, formerly a banker at Lehman Brothers. "It's not that relevant at this point whether they [central bankers] cut or not."

After sliding about 150 points early on, the Dow Jones Industrial was more recently up 43.48 points at 10,960.99, with 19 of its 30 components trading higher.

After lapsing to a low of $1.25 a share earlier on, AIG , was recently trading at $2.84 a share, down $1.92, or 40.1%%.

The giant insurer late Monday was downgraded by four rating agencies, which AIG had previously estimated could lead counterparties to demand another $14.5 billion in collateral.

The S&P 500 gained 4.35 points to 1,197.05, while the Nasdaq Composite climbed 6.75 points to 2,186.66.

Financials and consumer discretionary led sector gains on the S&P, with Merrill Lynch & Co. Inc. up 18.4% in the wake of its deal to be acquired by Bank of America Corp.

In the worst single-day point plunge since the Sept. 11, 2001 attacks, the Dow Jones Industrial Average on Monday plunged 504 points, as Lehman Brothers Holdings Inc. filed for bankruptcy protection and Merrill Lynch Co. Inc. hastily reached a deal to be purchased by Bank of America Corp.

Asian markets, several of which were closed on Monday, dropped sharply, with the Nikkei 225 losing 5% in Tokyo. The FTSE 100 fell 3.1% in London, hitting three-year lows.

The dollar held its ground, with the dollar index, which measures the U.S. unit against a basket of major currencies, stood at 79.022, up from 78.433 in late Monday's North American trading. .

On the New York Mercantile Exchange, oil futures fell sharply, losing $3.91 to $91.8 a barrel. .

In the current gloomy environment -- and an unemployment rate that spiked to 6.1% last month -- the Federal Open Market Committee is meeting Tuesday, with markets now expecting a quarter-point rate cut. .

The flip side of a rate cut now is that it could also undermine the confidence the Fed is trying to instill that the markets can work out Wall Street's problems with minimal interference from the government.

The Fed decision is due at 2:15 p.m. Eastern.

The New York Fed announced a large overnight repurchase agreement, saying it would inject billions of dollars into the financial system and is prepared to add additional funds later in the day if necessary. However, the market seemingly found little comfort in the move.

One of the two remaining independent brokerages, Goldman Sachs Group Inc. , reported its fiscal third-quarter profit slid 70% from a year ago. Shares of Goldman fell 3.3%. .

Shares of Goldman rival Morgan Stanley , which is slated report on Wednesday, declined 17%.

Another financial in distress, Washington Mutual Inc. , saw its credit ratings downgraded by Standard & Poor's.

U.K. bank Barclays Plc said it's in talks to buy some Lehman assets.

Outside of financials, Dell warned of further softening in information technology demand

Hewlett-Packard Co. said it would cut nearly 25,000 jobs over the next three years and take a $2 billion charge as it meshes its operations with Electronic Data Systems.

By Kate Gibson