Market reacts coolly to bank bailout repayment

Investors reacted coolly to word that 10 of the nation’s largest banks can repay $68 billion in bailout money.

Stocks zigzagged in a narrow range Tuesday after the Treasury Department’s widely expected announcement that the banks will be allowed to repay the money they received from the $700 billion Troubled Asset Relief Program created by Congress last October at the height of the financial crisis.

The banks have been eager to get out of the program to escape government restrictions such as caps on executive compensation. Among the banks that confirmed that they received permission to repay the bailout funds were: JPMorgan Chase & Co., American Express Co., U.S. Bancorp, Capital One Financial Corp., Bank of New York Mellon Corp. and BB&T Corp.

Rob Lutts, president and chief investment officer of Cabot Money Management, said banks getting approval to repay the government loans is a positive sign for the battered sector and provides a psychological boost for investors.

“It’s part of the healing process for the banking industry,” Lutts said.

Experts say the repayments indicate some stability has returned to the banking sector, which was thrown into chaos in September with the collapse of Lehman Brothers Holdings Inc. Others warn that by allowing only some banks to return funds, the government risks creating a tiered banking system with some large firms still tied to the bailout having to figure out how to compete with those who left. It could also widen the split between what traders regard as healthy and troubled banks.

In late morning trading, the Dow Jones industrial average fell 30.53, or 0.4 percent, to 8,733.96. The broader Standard & Poor’s 500 index fell 2.24, or 0.2 percent, to 936.90, and the Nasdaq composite index rose 5.81, or 0.3 percent, to 1,848.21.

On Monday, the market reversed steep losses in the last hour of trading as commodity prices came off their lows late in the day. The Dow ended less than 2 points higher after being down 130 points earlier in the session.

Volume though, was light, which can skew gains and losses.

Investors showed little reaction to word that wholesalers slashed inventories more than expected in April as businesses struggled to get stockpiles in line with falling sales. The Commerce Department said that wholesale inventories fell 1.4 percent in April, more than the 1.1 percent decline that economists expected. It marked the eighth straight month that inventories dropped.

Meanwhile, investors appeared reassured by comments from a Fiat spokesman that the Italian carmaker is committed to buying a controlling stake in the distressed U.S. automaker Chrysler despite a U.S. Supreme Court stay on the deal.

On Monday, Supreme Court Justice Ruth Bader Ginsburg put at least a temporary hold on Chrysler’s swift move through bankruptcy. Ginsburg could decide on her own to end the temporary order or she could refer the matter to the full Supreme Court to decide on whether to allow the sale to be completed.

Under terms of the agreement, Fiat has the option to abandon the deal if it is not completed by June 15, leaving Chrysler with few options other than to liquidate under bankruptcy court supervision.

On Tuesday in Italy, Fiat spokesman Gualberto Ranieri said “Fiat won’t walk away from Chrysler.”

Investors will also continue to keep a close eye on Treasury prices as yields on two-year and 10-year notes rose to new yearly highs Monday ahead of a fresh round of auctions this week. There is concern the Federal Reserve will need to hike interest rates before the end of the year to stave off inflation.

Lutts said rising interest rates can provide some headwinds for the market, but that any move by the Fed to raise rates will not come until very late in the year, and only after there is significant improvement in the jobs market.

Bond prices were mixed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.84 percent from 3.89 percent late Monday. The yield is a widely used benchmark for home mortgages and other loans.

While the yield on the 10-year note is significantly higher than it was just a few months ago, Lutts said it is still below a normal long-term range of closer to 4.5 percent, meaning there is still room for further increases in the coming months.

The yield on the three-month T-bill was flat at 0.18 percent from late Monday.

The dollar was mixed against other major currencies, while gold prices fell.

In other trading, the Russell 2000 index of smaller companies rose 1.20, or 0.2 percent, to 525.99.

About seven stocks rose for every six that fell on the New York Stock Exchange, where volume came to 308.4 million shares compared with 323.5 million shares traded at the same time Monday.

Overseas, Japan’s Nikkei stock average fell 0.8 percent. In afternoon trading, Britain’s FTSE 100 rose 0.1 percent, Germany’s DAX index fell 0.1 percent, and France’s CAC-40 rose 0.1 percent.

Copyright 2009 The Associated Press.