Market reacts coolly to bank bailout repayment

Investors have little reaction to 10 banks getting OK to repay $68 billion in bailout funds
Tim Paradis, AP Business Writer
On Tuesday June 9, 2009, 10:53 am EDT

NEW YORK (AP) -- 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 after the Treasury Department's widely expected announcement that the banks, which were not named, 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. American Express Co., BB&T Corp., JPMorgan Chase & Co., Morgan Stanley and U.S. Bancorp have told the Associated Press they are being allowed to repay the money.
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 have said such repayments would indicate some stability has returned to the banking sector, which was thrown into chaos last fall with the collapse of Lehman Brothers. However, by granting only some banks the ability to return funds, the experts say that could create a tiered banking system with some large firms still tied to the government bailout having to figure out how to compete with those no longer connected to the loans.
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.
In midmorning trading, the Dow Jones industrial average rose 2.80, or less than 0.1 percent, to 8,767.29. The broader Standard & Poor's 500 index rose 1.37, or 0.2 percent, to 940.51, and the Nasdaq composite index rose 11.84, or 0.6 percent, to 1,854.24.
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.
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 rose to 0.19 percent from 0.18 percent late Monday.
The dollar was mixed against other major currencies, while gold prices fell.