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CNNMoney - Alexander Twin, senior writer, 06 October 2008
Tough day for stocks
But losses are pared in half after Dow drop reaches 800 points on credit crisis.

NEW YORK (CNNMoney.com) -- Stocks plunged Monday, with the Dow down as much as 800 points during the session, as the $700 billion bank bailout plan and European government attempts to prop up faltering banks failed to comfort panicky investors.

But the Dow Jones industrial average (INDU) and other major indexes cut losses in the final hour. The Dow ended down just short of 370 points.

The index fell to 9,525.32, the index hit its lowest level during a session since Oct. 24, 2003, when it touched 9,497.72.

Other indexes also cut losses in the final hour.

The Standard & Poor's 500 (SPX) index, after falling to its lowest point since Sept. 12, 2003, ended with a loss of 3.6%. The Nasdaq composite (COMP) ended down 4% after falling to its lowest point since Aug. 28, 2003 during the session.

Credit markets remained, with two key measures of bank jitters hitting all-time highs. Treasurys rallied, lowering the corresponding yields as investors sought safety in government debt. Gold rallied for the same reason. Oil dipped. The dollar jumped versus the euro and fell against the yen.

Investors across the board are realizing that the $700 billion U.S. bank bailout was not a cure-all, said Dan Genter, president and CEO at RNC Genter Capital Management. The package involves the Treasury buying bad debt directly from banks in order to get them to start lending to each other again "Everybody thought that the bailout was a panacea. But it's not, it's a tourniquet that stops the bleeding so the patient doesn't die right away," Genter said.

The plan could end up doing what it's meant to do, but there's a lack of trust in Congress' ability to do this, said Scott Armiger, portfolio manager at Christiana Bank & Trust Company.

"People just don't have faith that the government can get us out of this," he said.

The spate of European bank rescues underlined the global nature of the crisis.

Additionally, investors were disappointed that the Federal Reserve didn't stepped in to announce an emergency interest-rate cut, said Ben Halliburton, chief investment officer at Tradition Capital Management.

"It looks like panic capitulation, but there's no telling how long it will last," Halliburton said. "The concern is that we will roll into a very severe recession or even a depression."

A CNN/Opinion Research poll showed that nearly 60% of Americans think a depression is likely.

A measure of investor fear surged, with the CBOE Volatility index (VIX ), or the VIX, at a 19-year high.

The rise shows fear on a short-term basis is rising, but not enough to signal a stock market bottom is forming, said Todd Salamone, senior VP of research at Schaeffer's Investment Research. "Fear is getting higher, but it's not at panic levels that have implied major market bottoms in the past," he said.

After the close, Wells Fargo (WFC) and Citigroup both agreed to a legal standstill in their battle for Wachovia (WB).

Also after the close, Bank of America (BAC) reported a steep drop in profits that was short of estimates. The bank also cut its dividend and said it will raise $10 billion through a stock sale. Shares fell 3% in extended-hours trading.

Bailout questions remain: Stocks slumped Friday, as Wall Street's worst week in seven years ended with President Bush signing the historic $700 billion bailout bill after weeks of contentious debate.

President Bush said Monday that the purposed of the package was to loosen up the nation's credit markets to "get money moving again."

However, Bush said "it's going to take a while," for the program to start working. "We don't want to rush into the situation and have the program not be effective," he said.

On Monday, the Treasury Department issued interim guidelines for hiring money managers to run the programs and for preventing conflicts of interest. Treasury Secretary Henry Paulson also announced the bailout chief.

While the package should help in the longer run, it won't loosen up credit markets in the short term, analysts said. With cash still scarce, investors remained on edge.

"Purchases that require financing are extremely difficult to pull off currently and that's going to have a severe impact on the economy," said Tradition Capital's Halliburton.

The Federal Reserve attempted to address this Monday by making an additional $300 billion available to banks in return for a broad range of damaged assets. That raises the amount available to banks to $600 billion as of Monday and the Fed could expand that to $900 billion by the end of the year.

Global meltdown: Underlining the broad scope of the market malaise, Germany negotiated a $69 billion Sunday for commercial lender Hypo Real Estate AG. Europe's second-largest economy also guaranteed all private bank accounts.

French BNP Paribas said it would 75% of troubled Fortis' Belgium bank after a government bailout failed to reassure investors.

European Union banks are in the process of devising a broader rescue although they have indicated that it would be on a smaller scale than what was seen in the United States.

Global markets, with Asian and European stocks posting big losses. Russia's main market was shut down twice before closing with a loss of 20%.