Wall St. Trims Losses As Bank Fears Wane

Despairing investors keep unloading stocks - and there are no signs that the selling will end anytime soon.

Wall Street tumbled again Friday, giving the market a painful end to another terrible week, one that left the major indexes down more than 6 percent. The reality of a protracted recession, and the likelihood that government intervention can do little to hasten its end, had investors again abandoning stocks, particularly those of struggling financial companies.

CBS News has learned that a "stress test" for the major banks, announced by Treasury Secretary Tim Geithner last week will begin imminently. The measure will be aimed at exposing the extent of bad loans on their books.

"Whether it is going be government funded, or its going to be funded by the private sector, these banks need more capital," said Collyn Gilbert told CBS News correspondent Anthony Mason. "That's the bottom line. And I think that's the immediate need that faces the industry right now."

In a memo to employees today, Bank of America's CEO Ken Lewis said his company can make it "on its own." But Senate Banking Chairman Chris Dodd said some banks may be have to be nationalized for a "short time," Mason reported.

Friday's drop, which shaved 100 points off the Dow Jones industrial average, was led by financial stocks and came a day after the market's best-known indicator dropped to its lowest level since the depths of the last bear market, in 2002. And the Standard & Poor's 500 index, the barometer most closely watched by market pros, came close to its lowest point in nearly 12 years.

Wall Street has been sinking lower and lower as investors come to terms with the fact that the optimism that fed a late-2008 rally was clearly unfounded. Companies' forecasts for this year, which accompanied a dismal series of fourth-quarter earnings reports, pounded home the fact that no one can figure out when the recession will end.

"It was a market that was built on that hope and what we're seeing now is an unwinding of that," said Todd Salamone, director of trading and vice president of research at Schaeffer's Investment Research in Cincinnati, of the rally from late November to early January.

The disappointment seen this week grew out of the market's growing recognition that the multibillion dollar stimulus package and bailout program put together by the Obama administration are not likely to turn the economy around for some time.

"There were a lot of people that were banking on Washington to get us out of this. I don't know if there is anything Washington can do," Salamone said. He said the global economy is going through the tedious process of reducing borrowing and working through bad debt - something that government help can't speed up.

With the week erasing whatever shreds of hope the market had, there is virtually no chance of a rally on Wall Street. What the market might see is a blip upward - but blips tend to quickly evaporate.

That happened Friday. Stocks erased some of their losses after White House press secretary Robert Gibbs doused fears that the government would nationalize crippled banks. Investors who worried about seeing their shares wiped out by a government takeover welcomed the news, but it didn't erase broader concerns about the economy.

The Dow Jones industrials briefly went into positive territory, but quickly turned downward again.

Salamone said investors had been too hopeful in late 2008 and at the start of this year that the new administration would be able to quickly disentangle the economy from its troubles.

According to preliminary calculations, the Dow industrials fell 100.28, or 1.3 percent, to 7,365.67 after earlier falling more than 215. On Thursday, the Dow broke through its Nov. 20 low of 7,552.29, and closed at its lowest level since Oct. 9, 2002.

The Dow's 6.2 percent slide for the week was its worst performance since the week of Oct. 10, when it lost 18.2 percent.

The Standard & Poor's 500 index on Friday fell 8.89, or 1.14 percent, to 770.05. The benchmark most watched by traders came within less than 2 points of its Nov. 20 close of 752.44. It remains above its Nov. 21 trading low of 741.02.

The Nasdaq composite index fell 1.59, or 0.11 percent, to 1,441.23.

For the week, the S&P fell 6.9 percent, while the Nasdaq lost 6.1 percent.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 2.12 billion shares.

The Russell 2000 index of smaller companies fell 5.75, or 1.38 percent, to 410.96.

Other world indicators also fell sharply. Britain's FTSE 100 declined 3.2 percent, Germany's DAX index tumbled 4.8 percent, and France's CAC-40 fell 4.3 percent.

Shares of financial bellwethers Citigroup Inc. and Bank of America Corp. plunged on worries the government will have to take control of them. Citigroup fell 22 percent, while Bank of America fell 3.6 percent. But the stocks were down as much as 36 percent during the session.

The fears about the banks are hurting shareholders of those companies and are also propelling the rest of the market downward because the broader economy can't function properly when banks aren't able to lend at more normal levels.

"Financing is the blood which runs through our nation's veins. It's what keeps us alive," said Lawrence Creatura, a portfolio manager at Federated Clover Investment Advisors.

He said the talk of nationalizing banks only underscores the troubles with the economy.

"Things are clearly not normal. It's not healthy. The patient was on life support and now what we're talking about getting out the paddle with respect to nationalization," Creatura said.

As investors dropped out of stocks, safer investments like Treasury debt and gold rose. The price of the benchmark 10-year Treasury note rose sharply, sending its yield down to 2.79 percent from 2.86 percent. The yield on the three-month T-bill, considered one of the safest investments, fell to 0.26 percent from 0.30 percent late Thursday.

Gold broke above $1,000, closing at $1,002.20 an ounce on the New York Mercantile Exchange.

Investors are looking desperately at any safe havens simply because the stock market, which rises and falls on investors' expectations for the future, sees only trouble ahead.

"There's still a big fear factor syndrome," said Michael Strauss, chief economist and market strategist at Commonfund. "There is a focus on what is happening here and now instead of six months to nine months from now."

James Stack, president of market research firm InvesTech Research in Whitefish, Mont., said, "We're in uncharted waters," and that the evaporation of investor confidence is making the markets impossible to predict.

"Based on most historical data from the past 60 years we should be at or very close to a market bottom." But, he said, the nation is dealing with its biggest economic problems since the Great Depression, and that historical data is of little help right now.