U.S. Stocks Tumble as Congress Stalls Bailout, WaMu Is Seized

By Elizabeth Stanton

Sept. 26 (Bloomberg) -- U.S. stocks tumbled, dragging the Dow Jones Industrial Average to its worst weekly retreat in five years, as the government's $700 billion financial rescue plan stalled in Congress and Washington Mutual Inc. collapsed.

Wachovia Corp. sank 27 percent and Morgan Stanley slid 14 percent as a group of House Republicans said they wouldn't support the proposed bailout as outlined by Treasury Secretary Henry Paulson. WaMu, once the biggest U.S. thrift, plunged 91 percent after regulators deemed the company ``unsound.'' All 10 of the main industry groups in the Standard & Poor's 500 Index retreated.

``There's too much focus on the bailout and not enough on what's beyond the bailout,'' said David Baker, chief investment officer at North American Management Corp. in Boston, which oversees $1.4 billion. ``The financial pain and malaise is going to result in economic pain and malaise. We're not optimistic on the market going forward.''

The S&P 500 sank 18.42, or 1.5 percent, to 1,190.76 at 9:42 a.m. in New York. The Dow Jones Industrial Average declined 132.61, or 1.2 percent, to 10,889.45. The Nasdaq Composite Index dropped 38.48, or 1.8 percent, to 2,148.09. About 10 stocks fell for each that gained on the New York Stock Exchange.

Latest Casualty

The S&P 500 erased most of yesterday's advance and extended its weekly decline to 3.7 percent, while the Dow's weekly decline grew to more than 4.4 percent. Stocks climbed for the first time in four days yesterday as speculation grew that Congress would reach agreement on the bank bailout plan.

The S&P 500 lost 24 percent from its October record after global banks racked up more than $520 billion in credit losses and writedowns stemming from the collapse of the subprime mortgage market. WaMu is the latest casualty of the crisis that drove Lehman Brothers Holdings Inc. and IndyMac Bancorp out of business and led to the emergency takeovers of Merrill Lynch & Co. and Bear Stearns Cos.

Marc Faber, managing director of Marc Faber Ltd. in Hong Kong, told Bloomberg Television the U.S. government's rescue package may require as much as $5 trillion, seven times the amount Paulson has requested.

Wachovia tumbled $3.70 to $10. Morgan Stanley, which is transforming into a bank holding company, slid $2.58 to $24.52.

`Perfect Solution' Difficult

The Financial Select Sector SPDR Fund, an exchange traded fund of financial stocks known by its XLF ticker symbol, slumped 4.1 percent to $19.97 and is down 41 percent in the past year. Republicans splintered late yesterday over the proposed $700 billion rescue of the U.S. financial system, imperilling an agreement hours after a bipartisan group of negotiators and the White House said one was near.

``It's difficult to get a perfect solution here,'' said Richard Weiss, who helps oversee more than $53 billion as chief investment officer for City National Bank in Beverly Hills, California. ``The moral hazard is out there as a potential concern, but what choice was there at this point? This is not about rescuing a few companies or a few highly paid executives. This was about shoring up the U.S. and global financial system.''

WaMu `Unsound'

WaMu, which traded for more than $35 a year ago, plunged $1.53 to 16 cents. JPMorgan fell $1.16 to $42.30. Customers of WaMu withdrew $16.7 billion from accounts since Sept. 16, leaving the Seattle-based bank ``unsound,'' the Office of Thrift Supervision said late yesterday. The takeover gives JPMorgan about $900 billion in deposits and 5,400 bank branches nationwide. WaMu rejected JPMorgan's March takeover bid at $4 a share.

Stock-index futures extended declines before the open of U.S. exchanges after the Commerce Department said the economy grew at a 2.8 percent annual rate in the second quarter, trailing economists' average forecast of 3.3 percent growth.

The growth rate probably slowed to 1.2 percent in the current quarter and 0.6 percent in the fourth, according to a Bloomberg surveys of economists. Gross domestic product shrunk at a 0.2 percent rate in last year's fourth quarter, the first negative growth rate since 2001.

S&P yesterday cut the market-value ranges for inclusion in its three main U.S. indexes after this year's bear-market rout wiped $1.8 trillion off the value of U.S. equities.

Consumer Confidence

The turmoil that roiled U.S. financial markets in the past few weeks probably restrained consumer sentiment in September, economists said before a report today that is due at about 10 a.m. Washington time. The Reuters/University of Michigan's final confidence reading dropped to 71 this month from a preliminary estimate of 73.1 issued two weeks ago, according to the median forecast of 61 economists surveyed by Bloomberg News. The measure would still be up from August, reflecting a drop in fuel costs.

Research In Motion Ltd., the maker of the BlackBerry e-mail phone, plunged 22 percent to $75.50 after competition from Apple Inc.'s new iPhone curbed its profit forecast for the second quarter in a row. The company said earnings will be 89 cents to 97 cents a share in the third quarter. Analysts in a Bloomberg survey had predicted earnings of 99 cents on average for the period.

To contact the reporters on this story: Sarah Jones in Copenhagen at sjones35@bloomberg.net; Elizabeth Stanton in New York at estanton@bloomberg.net.