Patrick Kenny, left, of Lehman Brothers MarketMakers talks to fellow traders on the floor of the New York Stock Exchange Friday, Sept. 5, 2008, in New York. Selling swept across Wall Street for a second straight session on news that the economy shed jobs for the eighth straight month in August and at a faster-than-expected pace. (AP Photo/Henny Ray Abrams)
(CBS/ AP) Volatility again swept the financial markets Monday as investors grew nervous about an amorphous government plan to buy $700 billion in banks' mortgage debt. Stocks fell sharply, taking the Dow Jones industrials down more than 370 points, while investors sought safety in hard assets such as gold and oil, which at one point shot up more than $25 a barrel.
The dollar skidded lower, contributing to oil's surge, while the credit markets were still uneasy but not showing the frantic trading they saw last week. Oil's rise of $16.37 to a closing price $120.92 a barrel came as investors snapped up supplies to cover a contract that expired at the end of Monday's session; still, the advance showed the intensity of emotion in the market, and still-active contracts also rose sharply.
Gold, also in demand as a safe haven, rose $40.90 to $905.60.
While investors still appeared relieved that federal authorities are constructing a plan to relieve the nation's banks of their toxic assets, many investors weren't waiting for the details to emerge before seeking safety. Wall Street is not sure how successful the plan will be in unfreezing credit markets, which many businesses depend on to fund day-to-day operations, and for propping up the still-weak housing market.
Bush administration officials and congressional leaders have been meeting on the rescue plan, the thrust of which congressional leaders have endorsed. Many market observers are hoping for details of the plan to emerge by midweek and delays could weigh on investor sentiment.
"This is not an 'all is clear' signal that we have now," said Axel Merk, portfolio manager at Merk Funds.
While investors try to determine how helpful the government's lifeline might be they also were absorbing more news about the rapid changes in the banking sector. Morgan Stanley said it is working to sell up to a 20 percent stake to Japan's Mitsubishi UFJ Financial Group Inc., perhaps a sign that the government's stabilizing hand will make investors more willing to put money into banks.
The announcement comes after the Federal Reserve late Sunday granted Morgan Stanley and Goldman Sachs, the country's last two major investment banks, approval to change their status to bank holding companies. The change of status will allow the companies to set up commercial banks that will be able to take deposits, significantly bolstering the resources of both. However, they also will be subject to more regulation.
That shift came a week after negotiations failed to save Lehman Brothers Holdings Inc. That and the government's plan to bail out insurer American International Group Inc. helped lead to a seizing up of the credit markets that spurred the government to formulate its plan to rescue companies from their bad debt, which was in turn destroying confidence in the credit markets.
The yield on the Treasury's 3-month Treasury bill was at 0.90 percent Monday, down from 0.94 percent late Friday, indicating that investors were still willing to take low returns on a safe asset. However, the yield was a far cry from yields around zero at the height of last week's frenetic buying; yields move in the opposite direction from price. Short-term Treasurys are seen as the safest place to place cash.
The Treasury's 2-year note's yield was at 2.19 percent, up from 2.13 percent Friday. The yield on the 10-year benchmark Treasury was higher, at 3.83 percent compared with 3.82 percent Friday.
According to preliminary calculations, the Dow fell 372.75, or 3.27 percent, to 11,015.69. The retreat comes after the stock market's best two-day advance in years so some retrenchment, especially amid the anxiety on the Street, wasn't unexpected.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 47.99, or 3.82 percent, to 1,207.09, and the Nasdaq composite index fell 94.92, or 4.17 percent, to 2,178.98.
Investors could grow nervous about the trajectory of the government's bailout plan if it appears that enough progress isn't being made. Stocks extended their declines Monday after Senate Banking Committee Chairman Chris Dodd, D-Conn., said he wants the government to receive a stake in the companies helped by the rescue.
Dodd told CBS's The Early Show on Monday that taxpayers should be "first in line" to get money back once conditions in the industry stabilize and recover.
"We want oversight," he said, adding, "It's important that we act quickly, but it's more important that we act responsibly."
Senate Democrats are also calling for the plan to include aid for homeowners struggling with mortgage payments and caps on executive compensation.
"There is going to have to be some sort of a homeowner relief package. I think that's part of where the give-and-take process is going to unfold this week," said Michael Strauss, chief economist at Commonfund. "I think the moderates on both sides know something has to get done."
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are scheduled to appear before Congress on Wednesday for a briefing on the economy.
The market did get some good news from Microsoft Corp., which said it plans to repurchase as much as $40 billion of its shares. The software maker said it completed a previous $40 billion buyback plan. The company also raised its quarterly dividend to 13 cents from 11 cents. Microsoft rose 44 cents to $25.60.
Morgan Stanley said it signed a letter of intent to sell its stake to Mitsubishi UFJ Financial and that the price of the stake would be based on Morgan's book value after Mitsubishi completes due diligence. Morgan Stanley rose 71 cents, or 2.6 percent, to $27.92.
Meanwhile, Goldman Sachs fell $5.06, or 3.9 percent, to $124.74 following announcement of its move to become a commercial bank.
Other financial stocks fell sharply amid the continued uncertainty about the sector. JPMorgan Chase & Co. fell $5.48, or 12 percent, to $41.57, while American Express Co. fell $2.95, or 7.3 percent, to $37.45.
Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 903.9 million shares.
The Russell 2000 index of smaller companies fell 28.21, or 3.7 percent, to 725.53.
Overseas, Japan's Nikkei 225 index climbed 1.42 percent, and Hong Kong's Hang Seng Index rose 1.58 percent. Britain's FTSE fell 1.41 percent, Germany's DAX declined 1.32 percent and France's CAC 40 fell 2.34 percent.
© MMVIII, CBS Interactive Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.