U.S. Stocks Rally To Close Higher On Hopes For AIG Rescue
NEW YORK (MarketWatch) -- U.S. stocks rallied in the final hour of trading to close higher Tuesday, reversing some of the Monday's stinging losses on expectations the government might step in to rescue embattled insurer American International Group Inc.
"It now appears as though the Federal Reserve will exercise its responsibility as the lender of last resort in a crisis and help AIG," said Hugh Johnson, chairman of Johnson Illington Advisors.
"The Federal Reserve and the Treasury took a chance in letting Lehman file for Chapter 11 that it would not lead to systemic failure, or a general loss of confidence, and they were wrong. If they want to take another chance, they better brace themselves," said Johnson.
After sliding about 150 points in early trading, rallying back and then falling again after the Federal Reserve refused to cut interest rates, the Dow Jones Industrial Average pulled into positive territory and stayed there on media reports that AIG might get a loan from the government.
The blue-chip index closed at 11,059.02, up 141.51 points, or 1.3%.
After lapsing to a low of $1.25 a share earlier on, AIG ended at $3.75 a share, down $1.01, or 21.2%.
The giant insurer late Monday was downgraded by four ratings agencies, which AIG had previously estimated could lead counterparties to demand another $14.5 billion in collateral.
"Excesses at Lehman and Bear Stearns and others were outrageous. But as outrageous as it might be, it's not a time to be outraged, it's a time to do something to insure that confidence in the financial system does not deteriorate further," said Johnson.
Of the Dow's 30 components, 18 posted gains, led by Bank of America Corp. , which gained 11.3%, and J.P. Morgan & Co. , up 10.1%.
The S&P 500 gained 20.9 points, or 1.8%, to 1,213.6, while the Nasdaq Composite climbed 27.99 points, or 1.3%, to 2,207.9.
The stock indexes had reverted to sharp losses after the Federal Reserve opted to leave its benchmark lending rate unchanged, leaving investors to mull the fate of AIG.
"The Federal Reserve's decision on interests didn't matter, and that's because it is so overwhelmed by what the Federal Reserve is doing to help the financial system, which is in crisis mode. This is not over and it's not going to be easy," said Johnson.
Holding its fed funds rate steady at 2.0%, the central bank's statement expressed concern about the economy, while moderating its worry over inflation.
The fear and uncertainty underlying the market will persist until the outcome at AIG is known, rendering the Federal Reserve's interest rate decision of little importance, said Marino Marin, managing director at Gruppo, Levey & Co. "It's not that relevant at this point whether they [central bankers] cut or not."
"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 Marin, formerly a banker at Lehman Brothers.
The financial and energy sectors fronted gains among the S&P's 10 industry groups, with the former gaining 4.5% and the latter advancing 3.4%. Utilities and telecommunication services led the laggard sectors.
Volume on the New York Stock Exchange topped 2.1 billion, with decliners passing advancing issues roughly 4 to 3. On the Nasdaq, 1.4 billion shares traded, and advancers beat decliners 4 to 3.
Treasury prices declined, with two-year note yields rising 17 basis points, or 0.17%, to 1.88.
The dollar index , which measures the U.S. unit against a basket of major currencies, stood at 79.200, up from 78.433 in late Monday's North American trading. .
On the New York Mercantile Exchange, crude-oil for October delivery ended at $91.15 a barrel, down $4.56, or 4.8%. .
Finanials' SOS
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 1.8%. .
Another financial in distress, Washington Mutual Inc. , saw its credit ratings downgraded by Standard & Poor's.
Merrill Lynch & Co. Inc. shares climbed 30% in the wake of its deal to be acquired by Bank of America Corp.
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.
Asian markets, several of which were closed on Monday, dropped sharply, with the Nikkei 225 losing 5% in Tokyo. . The FTSE 100 fell 3.4% in London, hitting three-year lows. .
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 hastily agreed to be bought out.
By Kate Gibson