Stocks tumble after gov't unveils financial plan

By TIM PARADIS, AP Business Writer

NEW YORK – Investors are frustrated with the government's latest bank bailout plan — and showed it by unloading stocks.

The major stock indexes fell more than 4 percent Tuesday, including the Dow Jones industrial average, which tumbled 382 points. Financial stocks led the market lower, a sign of how concerned Wall Street is about the government's ability to restore the health of the banking industry. Demand for safe havens like Treasurys and gold rose.

Traders and investors complained about what they saw as a lack of specifics from Treasury Secretary Timothy Geithner on how the government will direct more than $1 trillion in public and private support to the financial system.

The plan is aimed at restoring proper functioning to credit markets, which seized up over worries about bad debt after the September bankruptcy of Lehman Brothers Holdings Inc. The latest plan calls for a government-private sector partnership to help remove banks' soured assets from their books. It would also boost an effort to unclog the credit markets that govern loans to consumers and businesses.

"The good news is they are going to spend a trillion dollars, the bad news is they don't know how," said James Cox, managing partner at Harris Financial Group.

"They built this up as being a panacea," he said. "There was so much hope pinned on them to do a good job. The expectations have been so high. It's hard to live up to."

But Peter Jankovskis, co-chief investment officer at OakBrook Investments, said the government was right to outline a broad plan rather than putting something together hastily that might otherwise fail.

"They are doing the right thing by taking their time and not rushing through with bad policy," Jankovskis said.

Some investors questioned whether the plan, which followed previous efforts in the final months of 2008, would work. Some selling was to be expected, however, as stocks rose sharply last week ahead of the announcement.

Geithner's speech "basically puts a spotlight on the fact that the government has no idea how to fix the problem," said Jeff Buetow, senior portfolio manager at Portfolio Management Consultants. "People bought on rumor and hope, and now they're selling on reality."

Investors focused on the financial rescue showed little reaction to the Senate's approval of its $838 billion economic stimulus package. The bill must now be reconciled with an $819 billion version passed by the House. Congressional leaders hope to have the bill on President Barack Obama's desk before a recess next week.

"The economy is in deep trouble. The stimulus plan is not very stimulative. It's not addressing the real problem," Buetow said. "We have an insolvent financial system. The government is trying to find a comprehensive way to save it. They can't afford to just throw money at it. That's what they tried to do in the fall and that clearly did not work."

Stocks extended their slide after Federal Reserve Chairman Ben Bernanke didn't elaborate on the plan in testimony at a House Financial Services Committee hearing. Bernanke said the programs designed to revive the credit markets are showing promise and that any fix to the worst financial crisis since the 1930s would take time to work.

The Dow industrials fell 381.99, or 4.62 percent, to 7,888.88. It was the biggest drop for the Dow since Dec. 1, when the blue chips fell 680 points, or 7.7 percent.

It was also the lowest close since Nov. 20, when the blue chips finished at 7,552, a five-and-a-half year low. The Dow is still up 4.46 percent from that level, which many market observers hope will mark the bottom of the market's pullback since its record high levels of October 2007.

Broader stock indicators also tumbled. The Standard & Poor's 500 index fell 42.73, or 4.91 percent, to 827.16. It was the biggest drop for the index since the Obama inauguration on Jan. 20.

The Nasdaq fell 66.83, or 4.20 percent, to 1,524.73.

The Russell 2000 index of smaller companies fell 22.17, or 4.74 percent, to 445.77.

Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 1.76 billion shares.

Tuesday's sell-off was more orderly than many of those seen last fall and stocks finished off their lows. While demand for government debt rose, buying wasn't occurring with the panic seen after the collapse of Lehman Brothers.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.82 percent from 2.99 percent late Monday. The yield on the three-month T-bill, considered one of the safest investments, slipped to 0.30 percent from 0.32 percent late Monday.

The dollar rose against other major currencies. Gold prices also rose.

Light, sweet crude fell $2.01 to settle at $37.55 a barrel on the New York Mercantile Exchange.

Jankovskis, of Oak Brook Investments, said the government's plan doesn't resolve the question of how much the troubled assets weighing down banks' books are worth. By providing funds to purchase the assets or by buying them outright the government risks hurting banks by paying too little or hurting tax payers by paying too much.

"Valuation is the fundamental issue," Jankovskis said.

Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co. said the government might be playing politics by not proposing measures that would touch off great debate in Washington and meet with public approval. A government takeover of a bank, for example, wouldn't be politically palatable, he said.

"There are some people that believe the government is dancing around the issue of what has to be done and what is politically acceptable," he said.

Valentin also said some of the drop in stocks could be hastened by short sellers — investors who place bets that a stock will fall.

Short sellers last week snapped up shares of financial stocks to cover their bets in case Geithner's announcement sent stocks higher. Now, those investors can put their pessimistic bets back in place. This can weigh on the price of a stock and exacerbate selling.

Investors are simply left with many questions.

"I think generally we just don't know enough. We just don't know enough of what it all means," said Jon Biele, head of capital markets at Cowen & Co. "It's digestion time."

Bank stocks saw the biggest selling. Bank of America Corp. fell $1.33, or 19.3 percent, to $5.56, while Wells Fargo & Co. fell $2.71, or 14.2 percent, to $16.35.

Regional banks also showed big drops. Fifth Third Bancorp fell 70 cents, or 24 percent, to $2.19, while Huntington Bancshares Inc. fell 65 cents, or 25 percent, to $1.96. Conglomerate General Electric Co., which has a big finance arm and often trades like a bank stock, fell $1.02, or 8.1 percent, to $11.62.

Principal Financial Group Inc. fell $5.04, or 30 percent, to $11.99 after the insurer posted a fourth-quarter loss on investment and loan losses. The company's report raised fears that the company will be forced to raise cash.

Overseas, Britain's FTSE 100 fell 2.19 percent, Germany's DAX index fell 3.46 percent, and France's CAC-40 fell 3.64 percent. Japan's Nikkei stock average fell 0.29 percent.

Mexican drug violence spills over into the US

By ALICIA A. CALDWELL, Associated Press Writer

Just as government officials had feared, the drug violence raging in Mexico is spilling over into the United States.

U.S. authorities are reporting a spike in killings, kidnappings and home invasions connected to Mexico's murderous cartels. And to some policymakers' surprise, much of the violence is happening not in towns along the border, where it was assumed the bloodshed would spread, but a considerable distance away, in places such as Phoenix and Atlanta.

Investigators fear the violence could erupt elsewhere around the country because the Mexican cartels are believed to have set up drug-dealing operations all over the U.S., in such far-flung places as Anchorage, Alaska; Boston; and Sioux Falls, S.D.

"The violence follows the drugs," said David Cuthbertson, agent in charge of the FBI's office in the border city of El Paso, Texas.

The violence takes many forms: Drug customers who owe money are kidnapped until they pay up. Cartel employees who don't deliver the goods or turn over the profits are disciplined through beatings, kidnappings or worse. And drug smugglers kidnap illegal immigrants in clashes with human smugglers over the use of secret routes from Mexico.

So far, the violence is nowhere near as grisly as the mayhem in Mexico, which has witnessed beheadings, assassinations of police officers and soldiers, and mass killings in which the bodies were arranged to send a message. But law enforcement officials worry the violence on this side could escalate.

"They are capable of doing about anything," said Rusty Payne, a Drug Enforcement Administration spokesman in Washington. "When you are willing to chop heads off, put them in an ice chest and drop them off at a police precinct, or roll a head into a disco, put beheadings on YouTube as a warning," very little is off limits.

In an apartment near Birmingham, Ala., police found five men with their throats slit in August. They had apparently been tortured with electric shocks before being killed in a murder-for-hire orchestrated by a Mexican drug organization over a drug debt of about $400,000.

In Phoenix, 150 miles north of the Mexican border, police have reported a sharp increase in kidnappings and home invasions, with about 350 each year for the last two years, and say the majority were committed at the behest of the Mexican drug gangs.

In June, heavily armed men stormed a Phoenix house and fired randomly, killing one person. Police believe it was the work of Mexican drug organizations.

Authorities in Atlanta are also seeing an increase in drug-related kidnappings tied to Mexican cartels. Estimates of how many such crimes are being committed are hard to come by because many victims are connected to the cartels and unwilling to go to the police, said Rodney G. Benson, DEA agent in charge in Atlanta.

Agents said they have rarely seen such brutality in the U.S. since the "Miami Vice" years of the 1980s, when Colombian cartels had the corner on the cocaine market in Florida.

Last summer, Atlanta-area police found a Dominican man who had been beaten, bound, gagged and chained to a wall in a quiet, middle-class neighborhood in Lilburn, Ga. The 31-year-old Rhode Island resident owed $300,000 to Mexico's Gulf Cartel, Benson said. The Gulf Cartel, based in Matamoros just south of the Texas border, is one of the most ruthless of the Mexican organizations that deal drugs such as cocaine, marijuana, methamphetamine and heroin.

"He was shackled to a wall and one suspect had an AK-47. The guy was in bad shape," Benson said. "I have no doubt in my mind if that ransom wasn't paid, he was going to be killed."

In July, Atlanta-area police shot and killed a suspected kidnapper while he was trying to pick up a $2 million ransom owed to his cartel bosses, Benson said.

State and federal governments have sent millions of dollars to local law enforcement along the Mexican border to help fend off spillover drug crime. But investigators believe Arizona and Atlanta are seeing the worst of the violence because they are major drug distribution hubs thanks to their webs of interstate highways.

In fact, drug officials have dubbed Atlanta "the new Southwest border," said Jack Killorin, a former federal drug agent and director of the Atlanta region's High Intensity Drug Trafficking Area task force.

El Paso, population 600,000, is only a quarter-mile away from Mexico's Ciudad Juarez, which has seen open gun battles and 1,700 murders in the last year. But El Paso remains one of America's safest cities, something Cuthbertson said is probably a result of the huge law enforcement presence in town, including thousands of Border Patrol and customs agents.

In the past year, more than 5,000 people have been killed across Mexico in a power struggle among Mexico's drug cartels and ferocious fighting between them and the Mexican government. The cartels have established operations in at least 230 U.S. cities, according to the Justice Department's National Drug Intelligence Center.

Payne said the U.S. and Mexico are working together to pressure the warring cartels. Payne cited the extradition of high-level drug suspects — four members of the Arellano Felix cartel in Tijuana were brought to the U.S. in December — and the capture or killings of several other top cartel leaders across Mexico in the past year.

"We have to make sure that we attack these criminal organizations at every level so that we are safer not only in Mexico and on the Southwest border, but here in the rest of the country," Payne said.

While some Americans may feel victimized by the spillover of violence, others are contributing to it. Americans provide 95 percent of the weapons used by the cartel, according to U.S. authorities. And Americans are the cartels' best customers, sending an estimated $28.5 billion in drug-sale proceeds across the Mexico border each year.

see also:

Stimulus bill survives Senate test, moves ahead

UK nuclear weapons plan unveiled

Tony Blair is addressing MPs about his plans for the future of the UK's independent nuclear weapons system.

He is set to back a new generation of submarines to carry Trident missiles, although there is likely to be a cut in the number of submarines, and warheads.

A number of Labour MPs oppose the plan, but the Tories say it would be "crazy" not to have UK nuclear weapons. The Lib Dems want a decision put back to 2014.

MPs will vote on the plans in the new year after a three month consultation.

In a world that's becoming increasingly uncertain... it seems crazy for us to say we will have one-sided disarmament Liam Fox Shadow defence secretary

The lifespan of the current Trident system is said to end in 2024 and ministers have said a decision is needed now to ensure the replacement is ready by then.

Critics say there should have been consultation before the decision was announced in the white paper published on Monday.

'Nuclear club'

But Mr Blair's official spokesman said it was "one of the most serious decisions any government can take... it's right and proper that the government takes on itself the duty to put a firm proposal to Parliament and for Parliament to vote on that".

Mr Blair says the system - 64 Trident missiles based on four Vanguard-class submarines nuclear submarines - is an essential part of Britain's ability to defend itself.

TRIDENT MISSILE SYSTEM Missile length: 44ft (13m) Weight: 130,000lb (58,500kg) Diameter: 74 inches (1.9m) Range: More than 4,600 miles (7,400km) Power plant: Three stage solid propellant rocket Cost: £16.8m ($29.1m) per missile Source: Federation of American Scientists

Defence chiefs are understood to have ruled out basing a new weapons system on land or planes.

Instead Mr Blair is expected to say, as he unveils the white paper to MPs in the Commons, that he backs a new generation of submarines able to carry both the existing Trident missiles and any successor missile.

Officials have dismissed reports that the new generation of missiles would be built abroad.

Critics argue that a Trident-type system is outdated now that the Cold War is over. The issue has divided Labour MPs.

Former defence minister Peter Kilfoyle told the BBC it was a "very inopportune moment" to replace Trident, adding: "We don't need to rush to some kind of decision over the next few months as appears to be the government's wish."

'Crazy'

Critics believe the estimated £10-25bn cost would be better spent elsewhere - saying Trident was designed for the Cold War era, not the current threats to the UK such as international terrorism.

It's hard to see what the point of the Cabinet's discussion was... BBC political editor Nick Robinson

Kate Hudson, from the anti-nuclear pressure group, CND, told BBC Five Live: "If we go ahead with developing new nuclear weapons, we can be absolutely certain that many other countries will proliferate nuclear weapons and we are going to end up with a situation of nuclear war."

Lib Dem leader Sir Menzies Campbell wants the number of UK warheads halved to 100 - a move he said could help kickstart multilateral disarmament.

But for the Conservatives, shadow defence secretary Liam Fox said: "In a world that's becoming increasingly uncertain - where countries like North Korea are developing nuclear weapons - where countries like Iran are trying to develop nuclear weapons - it seems crazy for us to say we will have one-sided disarmament."

He said the decision was about protecting the UK from 2025 to 2050: "We don't know what we will face at that time. One thing we know is that you can't suddenly conjure up a nuclear deterrent if you require it."

VOTE Should there be a new generation of nuclear-powered submarines? Yes No Don't know Results are indicative and may not reflect public opinion

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Washington's UN envoy quits post