Stocks are lower on Madoff fallout

NEW YORK - Stocks dropped yesterday as anxiety grew over the lengthening list of firms affected by investment manager Bernard Madoff and the potential losses to the financial sector.

Investors also were nervous ahead of earnings reports this week from the country's two largest investment banks, the Goldman Sachs Group Inc. and Morgan Stanley.

Stocks had traded mixed early on as investors were relieved to hear that President Bush was working on providing short-term government help for the auto industry.

But as that fear eased, concerns arose about companies' exposure to Madoff's fund. Well-respected in the investment community after serving as chairman of the Nasdaq Stock Market, Madoff was arrested Thursday after orchestrating what prosecutors say was a $50 billion Ponzi scheme to defraud investors.

Firms with exposure include HSBC Holdings P.L.C., Banco Santander Central Hispano S.A. - which is buying the remaining stake of Sovereign Bancorp Inc. - BNP Paribas, the Royal Bank of Scotland Group P.L.C. - the parent of Citizens Bank of Pennsylvania - and hedge fund Man Group P.L.C.

Besides the potential for hefty write-downs related to the losses, investors also fear redemptions will increase as investors pull money out of funds to counter their losses from Madoff-related investments.

Wall Street also is anticipating a bleak report from Goldman Sachs today. It would be Goldman's first quarterly loss since it went public in 1999. Morgan Stanley reports results tomorrow.

The Dow Jones industrial average fell 65.15, or 0.75 percent, to 8,564.53. The Standard & Poor's 500 index lost 11.16, or 1.27 percent, to 868.57, while the Nasdaq composite index fell 32.38, or 2.10 percent, to 1,508.34.

The Russell 2000 index of smaller companies fell 15.86, or 3.39 percent, to 452.57.

Investors also seemed hesitant to make any major moves ahead of the Federal Reserve's decision today on interest rates. Some analysts anticipate policymakers will cut the key rate by a half-point to 0.5 percent, while others expect a three-quarter-point reduction to 0.25 percent - which would be the lowest key rate on records going back to 1954.

Besides a rate cut, investors anticipate a resolution for the auto industry this week.

General Motors Corp. and Chrysler L.L.C. are seeking government funding, while Ford Motor Co. has said it has enough cash to survive 2009.

GM was the biggest gainer among the 30 stocks that make up the Dow, rising 14 cents, or 3.55 percent, to close at $4.08. The biggest loser yesterday was JPMorgan Chase & Co., which fell $2.31, or 7.47 percent, to $28.63, alongside other declining financial stocks.

Goldman Sachs fell $1.28 to close at $66.46, while Morgan Stanley lost 21 cents to close at $13.64.

Light, sweet crude for January delivery peaked briefly above $50 early yesterday, but then fell $1.77 from Friday's level to settle at $44.51 a barrel on the New York Mercantile Exchange.