Paulson backtracks, rather embarrassingly

Sometimes Wall Street really doesn’t get it. Numerous economist (us included) have argued numerous times from the sidelines that the original Paulson plan was bad. We have aslo argued that Gordon Brown’s plan was much better. Finally, Paulson gives in, but the market sees this as a sign to sell..

Brown’s plan, instead of the Paulson plan, focuses on strengthening bank capital (and guaranteeing inter-bank loans), which is way more effective, and we explained why before. Now Paulson seems, belatedly, to come around to this view completely. Much time wasted, and a perverse reaction from Wall Street, see article below:

Stocks lower as Paulson unveils change in bailout
Wednesday November 12, 12:25 pm ET By Sara Lepro, AP Business Writer
Wall Street losses steepen as Paulson unveils plan to not buy distressed bank assets

NEW YORK (AP) — An already disheartened Wall Street turned sharply lower Wednesday after Treasury Secretary Henry Paulson said the government won’t buy banks’ soured mortgage assets after all, disappointing investors who hoped to see the bad debt wiped off companies’ books. The Dow Jones industrials fell more than 270 points, and all the major indexes dropped more than 3 percent as the market retreated for a third straight session.

Paulson said the government’s $700 billion financial rescue package won’t purchase troubled assets from banks as originally planned. He said that plan would have taken too much time, and that the Treasury instead will rely on buying stakes in banks and encouraging them to resume more normal lending.

While the market had been pleased by the government’s decision weeks ago to buy banks’ stock, investors still hoped to see the financial industry relieved of the burden of the mortgage assets whose decline in value helped set off the nation’s financial crisis.

There is also concern that the bailout funds are being depleted rather quickly, said Jason O’Donnell, senior research analyst at Boenning & Scattergood.

“Investors are generally in favor of the emphasis on the capital purchase provisions,” O’Donnell said. But, “we’re down quickly to a small portion of total funds remaining for other purposes.”

Paulson also announced a new goal for the program to support financial markets which supply consumer credit in such areas as credit card debt, auto loans and student loans. He said, “with a stronger capital base, our banks will be more confident” to support economic activity.

Meanwhile, Morgan Stanley outlined plans to cut 10 percent of staff in its institutional securities group — its biggest business that covers everything from investment banking to stock trading. The nation’s No. 2 securities firm, which converted into a bank holding company in September, plans to scale back this business before the end of the year. The layoffs are in addition to a 10 percent cut made earlier this year.

Morgan Stanley also plans to restructure its money management business by cutting 9 percent of the group’s work force. The securities firm employs about 44,000 people worldwide.

Bleak news from some of the nation’s biggest retailers also sent stocks falling. Macy’s Inc. said it lost $44 million in the third quarter as sales at the department store retailer fell more than 7 percent. And consumer electronics retailer Best Buy Co. slashed its fiscal 2009 guidance on fears that consumer spending will erode even further.

Investors are worried that a severe pullback in consumer spending — which drives more than two-thirds of the U.S. economy — will prolong a global economic downturn.

In midday trading, the Dow shed 278.21, or 3.20 percent, to 8,415.75.

The broader Standard & Poor’s 500 index dropped 29.34, or 3.26 percent, to 869.61, and the Nasdaq composite index stumbled 47.86, or 3.03 percent, to 1,533.04.

The Russell 2000 index of smaller companies fell 17.00, or 3.52 percent, to 465.29.

Declining issues outnumbered advancers by about 9 to 1 on the New York Stock Exchange, where volume came to a light 506.92 million shares.

While concerns about consumer spending contributed to the market’s declines on Monday and Tuesday, Paulson’s remarks on Wednesday underscored the anxiety that remains about the health of the financial system.

Though the announcement marks a major shift in the original bailout plan and seemed to rattle investors, Wall Street analysts generally believe that the Treasury is now on the right path.

That’s really what they should have done originally,” said Matt King, chief investment officer of Bell Investment Advisors. “First and foremost, we have to make sure banks are going to survive and then we can worry about lending. This is the quickest and most efficient way to do that.”

Buying bad assets doesn’t do that,” he said.

In corporate news, the future of the country’s top automakers remained a major concern on the Street. House Speaker Nancy Pelosi wants Congress to support a financial bailout for the troubled U.S. auto industry, which is suffering under the weight of poor sales, tight credit and a sputtering economy.

President-elect Obama, when he met with President Bush at the White House on Monday, urged Bush to support aid for the auto industry, and Democrats in Congress have begun drafting legislation that would give General Motors, Ford and Chrysler access to $25 billion of the rescue funds.

General Motors shares rose 23 cents, or 7.9 percent, to $3.15, while Ford gained 11 cents, or 6 percent, to $1.91.

American Express Co. is said to be seeking about $3.5 billion from the government to help boost its balance sheet, according to a report in The Wall Street Journal citing people familiar with the situation. AmEx, the No. 4 U.S. credit card issuer, won approval Monday from the Federal Reserve to become a bank holding company, which gives it the ability to grow a large deposit base and access financing from the Fed.

AmEx shares dropped $1.80, or 8 percent, to $20.60.

Prudential Financial Inc. said late Tuesday its 2008 annual dividend will be roughly half of what it paid out to shareholders last year. The insurer said it will pay a dividend of 58 cents per share on Dec. 19 to shareholders of record at the close of business on Nov. 24. Last year, the company paid a dividend of $1.15 per share.

Prudential shares added 9 cents to $27.70.

Government bond prices, which did not trade Tuesday because of Veterans Day, moved higher as investors looked for safer investments. The three-month Treasury bill’s yield fell to 0.14 percent from 0.22 percent late Monday, and the yield on the benchmark 10-year Treasury note fell to 3.67 percent from 3.76 percent late Monday.

Lower yields indicate stronger demand.

Crude dropped below $57 a barrel Wednesday on the growing realization that global economic growth next year will slow more than originally feared, cutting demand for crude products such as gasoline. Light, sweet crude fell $2.59 to $56.74 a barrel on the New York Mercantile Exchange.

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

Overseas, Japan’s Nikkei closed down 1.29 percent and Hong Kong Hang Seng fell 0.73 percent. In European trading, London’s FTSE 100 fell 1.65 percent, Germany’s DAX fell 2.96 percent, and France’s CAC-40 dropped 2.96 percent.