Stocks End Mostly Lower in Volatile Session

Worries about Fannie and Freddie overshadowed testimony from Bernanke, Paulson, and Cox, a plunge in crude, and GM's big cost-cutting plan

Watch the Video…

In a jagged, see-saw session, major U.S. stock indexes ended mostly lower, with only the Nasdaq composite index able to eke out a small gain. It was certainly a busy day, replete with congressional testimony from Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, and Securities and Exchange Commission Chairman Christopher Cox; news of another cost-cutting plan by General Motors (GM); a plunge in the price of crude oil; data on inflation and retail sales; and a spate of major earnings releases.

But in the end, the continued worries about the health of mortgage-finance giants Freddie Mac (FRE) and Fannie Mae (FNM) trumped all other concerns. Shares of the two government-sponsored enterprises lost nearly one-quarter of their already greatly diminished value on Tuesday.

However, certain other financials, including Lehman Brothers (LEH), Washington Mutual (WM), and First Horizon National (FHN) rallied, aided by bargain hunters and investors covering short positions.

Bonds were mixed, while the dollar index moved lower. Gold futures were higher.

On Tuesday, the Dow Jones industrial average fell 92.65 points, or 0.84%, to end at 10,962.54, failing to hold above the psychologically significant 11,000 level. The broader S&P 500 index fell 13.39 points, or 1.09%, to finish at 1,214.91. The tech-heavy Nasdaq composite index gained 2.84 points, or 0.13%, to close at 2,215.71.

Trading volume was moderate. On the New York Stock Exchange, 24 stocks fell in price for every eight that gained. The ratio on the Nasdaq was 17-12 negative.

In testimony before the Senate Banking Committee Tuesday, noted that inflation risk intensified, but also

emphasized downside risks to growth. He said that officials expect the economy to improve "gradually" over the next two years, thanks to a "slow" housing recovery and gradual improvement in credit conditions. But he warned that "considerable uncertainty" surrounded that outlook. He said that the U.S. economy faces "numerous difficulties," suggesting those risks remain his top priority. He noted an "unusually uncertain" inflation outlook, and said that the Fed is watching for signs that higher commodity prices are becoming embedded in wages and expectations.

The Fed chief noted that "accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policy makers."

The central issue which Congress should tackle is the housing market, said Bernanke in a Q&A with lawmakers. He said the continued uncertainty over housing prices and housing activity is largely behind the financial market stresses, as well as stress in the economy. He expects some stabilization in construction this year, but is not sure where home prices will bottom. He is still trying to assess the impact of the current fiscal stimulus package.

On the GSEs, Bernanke said the Fed's goals are to protect the financial system, as well as taxpayers, and that a strong bank-like regulator for the GSEs is need, one that can restore confidence in the system.

The Fed chief was joined later by Treasury Secretary Henry Paulson to discuss the government’s rescue plan for mortgage giants Freddie Mac (FRE) and Fannie Mae (FNM). Paulson told the committee that Fannie and Freddie have the potential to pose systemic risks to the financial system and need a stronger regulator. He also urged Congress to pass legislation to reform oversight of the two government-sponsored enterprises, with modifications that provide them temporary government backstops for liquidity and equity capital.