Investors give bailout plan ho-hum reception

updated 8:12 p.m. ET Sept. 28, 2008

NEW YORK - Financial markets were subdued in early trading Sunday night after congressional leaders said they are poised to pass a $700 billion rescue plan for banks, brokerages, credit unions, thrifts and insurance companies.

Failure to reach an agreement would have led to severe market disruptions, analysts said. But even if investors did dodge a bullet and credit markets start to stabilize, the realities of a weak economy are likely to weigh on markets, they said.

"When you start thinking of the broader issues, a lot of this is very troubling," said Joseph Battipaglia, chief investment officer at Ryan Beck & Co. "We have in front of us a recession in the general economy, the consumer is dramatically retrenching their habits by cutting spending, and our financial system has sputtered. This isn't necessarily a confidence builder because now everybody knows how precarious the financial system really is."

In electronic trading Sunday night, futures on the Dow Jones industrial average, Standard & Poor's 500 index and the Nasdaq 100 all rose about 0.1 percent. The dollar recovered moderately against currencies such as the pound, euro and yen. The yield on three-month Treasuries fell slightly to 0.81 percent in Sunday night trading, an indication that flight-to-quality fears remain high.

The plan would allow the government to buy toxic mortgage-backed assets from embattled financial institutions, giving them fresh cash to bolster lending. It would permit the Treasury to immediately spend $250 billion to buy banks' risky assets, provide another $100 billion at the discretion of the president, and a final $350 billion unless Congress has a change of heart and the president decides not to veto the decision.

Even if the bailout is passed — the House votes on Monday, and the Senate later this week — the economy remains balanced on the edge of a recession. Unemployment has been rising; it's now at a five-year high of 6.1 percent and is expected to rise as high as 7.5 percent by late 2009.

With worries running high about recessions around the world, global stock market volatility should remain elevated. And while anxiety about the financial institutions could keep boosting demand for Treasury bills, pushing short-term rates down for U.S. government debt, a glut of new issues with longer maturities that must be sold to finance the rescue plan could weaken the dollar over time.

In early trading Sunday night, the euro fell to $1.4545, the pound fell to $1.8336, while the dollar rose to 106.28 yen.

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There are also plenty of banks still in trouble, and it may take time before the plan helps them.

Banks and brokerages wrote down about $400 billion worth of toxic mortgage investments since last year. Analysts believe write-downs could reach $1 trillion as rising home foreclosures further erode the values of mortgage-backed securities.

In the second quarter, the Federal Deposit Insurance Corp. estimated there were 117 banks and thrifts in trouble, the highest level since 2003. This past week Washington Mutual Inc. became the largest bank to fail in U.S. history, and investors are concerned there might be more failures to come.

In Europe, the beleaguered Dutch-Belgian banking and insurance giant Fortis NV is being partially nationalized due to the market dislocation. Troubled British mortgage lender Bradford & Bingley will also be nationalized and sold off in parts, British media reported Sunday.

The threat of more banks failing in the U.S. and abroad forced the government to act swiftly.

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