Credit crisis hits Wall Street stocks

The Dow Jones industrial average, which traded down more than 250 points in the session, briefly moved into positive territory today before ending down more than 125 points. The blue chips also traded below 11,000 for the first time in two years.

A new high for oil prices above 147 a barrel also weighed on stocks.

Investors’ focus was on the fate of the government-chartered companies. Shares of Fannie Mae and Freddie Mac fell sharply during the week on concerns about their stability. Wall Street is worried that a collapse of the two financiers would cause further shock to the financial system, and trigger more losses to banks and brokerages with significant holdings of mortgage-backed securities.

The well-being of Fannie Mae and Freddie Mac is crucial because they hold or guarantee about 5 trillion worth of mortgages. Their troubles are just the latest depressing turn in a year-old credit crisis that shows no sign of ending, disappointing some stock traders who thought just months ago that the worst was perhaps over.

Stocks fluctuated late in the session amid varying reports that the Federal Reserve could aid Freddie Mac and Fannie Mae.

Senator Christopher Dodd, the Senate Banking Committee chairman, raised the prospect that the companies could be given access to emergency Federal Reserve lending. Mr Dodd, who spoke today to Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, said the two are “looking at various options” for propping up the firms if they ultimately need help. Those include giving them access to the Fed’s emergency lending “discount window,” Dodd said.

Earlier this year, the Federal Reserve took the unprecedented step of offering direct loans to investment banks from that window.

However, some observers noted that Freddie Mac and Fannie Mae weren’t short of cash, but of access to capital.

“It started with housing but it’s now turning into this issue of availability of capital, said Jerry Webman, chief economist at Oppenheimer Funds in New York, referring to the problems in the financial sector. ”The issue is who is going to make good on the long-term debt, not who is going to provide them with short-term cash.“

The Dow fell 128.48, or 1.14%, to 11,100.54 after having fallen to 10,977.68. It last traded below 11,000 on July 25 2006.

Broader stock indicators also logged declines. The Standard & Poor’s 500 index fell 13.90, or 1.11%, to 1,239.49, and the Nasdaq composite index fell 18.77, or 0.83%, to 2,239.08.

Today’s drop meant Wall Street moved squarely into a bear market, which is defined as a 20% drop from a recent peak. The Dow is down 21.6% from the record closing high of 14,164.53 it reached in October. The S&P 500 is down 20.8% and the Nasdaq is off 21.7%.

The market’s other trouble spot, oil, continued its ascent, rising to a trading record of 147.27 amid tensions between the West and Iran. Light, sweet crude for August delivery settled up 3.43 at 145.08, slightly below a record close of 145.29 a barrel set more than a week earlier.

Bond prices fell sharply as investors worried a bailout of Fannie Mae and Freddie Mac could dent the government’s credit rating. Ordinarily, bonds are seen as a safe haven during stock market pullbacks. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.95% from 3.80% late yesterday. The dollar was mixed against other major currencies, while gold prices rose.

Freddie Mac fell 25 cents, or 3.1%, at 7.75, after trading as low as 3.89 in the session. Fannie Mae tumbled 2.95, or 22%, to 10.25 after trading as low as 6.68.

Lehman Brothers Holdings fell 2.87, or 16.6%, to 14.43 as traders fretted that the number four investment bank will succumb to soured debt.

Citigroup also struggling with the consequences of failed mortgages, announced it will sell its German retail banking operation to France’s Credit Mutuel for 7.7 billion.

Global banks and brokerages have scrambled to sell assets and raise capital in an effort to offset nearly 300 billion of write-downs linked to the credit crisis. Citi slipped 9 cents to 16.19 after saying it will book a 4 billion gain from the sale, which is part of a plan by Chief Executive Vikram Pandit to sell up to 500 billion in assets to help boost profitability.

Investors remain cautious about the entire financial sector, especially ahead of second-quarter reports due next week from major names like JPMorgan Chase and Merrill Lynch. JPMorgan declined 1.35, or 3.9%, to 33.16 and Merrill fell 1.10, or 3.8%, to 27.61.

The confluence of negative news offset a mostly positive quarterly report from General Electric. The industrial and financial conglomerate reported second-quarter profits that met analysts’ expectations. The company said the forecast across its business lines was mixed. The stock rose 2 cents to 27.66.

In economic news, the US’ trade deficit narrowed in May as exports – including industrial supplies and consumer goods – climbed to all-time highs. The Commerce Department said growing exports drove the trade gap down to 58.8 billion, a 1.2% decrease from April and the best showing since March.

Investors did get a better-than-expected reading on consumers. The Reuters/University of Michigan Consumer Sentiment index rose to 56.6 for July from 56.4 in June. It had been expected to decline.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 1.73 billion shares.

The Russell 2000 index of smaller companies rose 4.51, or 0.67%, to 674.95.