Investors listened to Ben Bernanke and Henry Paulson make their bailout pitch before lawmakers on Tuesday, and they didn't like what they heard.
Oh sure, the $700-billion (U.S.) price tag on the rescue package for financial institutions didn't surprise anyone. But they learned that Democrat and Rebublican senators alike have voiced some opposition to the package, which could delay its passing. As well, investors learned that the plan does not involve buying toxic assets from beleaguered financial institutions at firesale prices, but rather something close to the market value. That, potentially, leaves a lot of downside risk for taxpayers and no upside potential.
As for delaying or modifying the package, Mr. Bernanke outlined the risks in his testimony before the Senate Banking Committee: "I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover."
In other words, who wants to own stocks in this uncertain environment? The Dow Jones industrial average closed at 10,854.17, down 161.52 points, or 1.5 per cent, after treading water throughout most of the day. The broader S&P 500 closed at 1,188.22, down 18.87 points, or 1.6 per cent.
The losses were widespread - and, combined with Monday's loss, erased most of the gains enjoyed during a rally last Thursday and Friday. All 10 subindexes at the S&P 500 fell. At the Dow, 27 of the 30 members fell during the day. General Motors Corp. fell 7.4 per cent, General Electric Co. fell 4.6 per cent and Bank of America Corp. fell 2.5 per cent.
In Canada, the S&P/TSX composite index closed at 12,532.63, down 105.44 points, or 1.5 per cent. There, the losses weren't nearly as widespread though, with four of the 10 subindexes rising.
Fairfax Financial Holdings Ltd., which has made bearish bets on the stock market and may benefit from the demise of American International Group Inc., rose another 5.3 per cent - bringing its cumulative rise to more than 40 per cent in the past four trading days. Other financial stocks performed well: Royal Bank of Canada rose 1 per cent, Bank of Nova Scotia rose 3.3 per cent and Manulife Financial Corp. rose 4.2 per cent.
Energy and materials stocks declined, though, following the price of crude oil and gold. Oil fell to $106.61 a barrel, down $2.76; gold fell to $891.20 an ounce, down $17.80. Suncor Energy Inc. fell 2.7 per cent, Goldcorp Inc. fell 2.1 per cent and Potash Corp. of Saskatchewan Inc. - an agriculture stock that generally moves with commodities - fell 9.7 per cent.