Credit markets remain stressed, with short-term borrowing costs rising as banks hoarded cash. Oil prices fell and gold prices rose. The dollar was mixed versus other major currencies.
The Dow Jones industrial average (INDU) lost 0.6% around 3 hours into the session, with a bounce in select bank shares after the recent battering helping to offset the broader weakness.
The Standard & Poor's 500 (SPX) index lost 1.3% and the Nasdaq composite (COMP) lost 1.6%.
Stocks rallied Thursday after lawmakers said they had essentially agreed on terms of the $700 billion bank bailout plan following days of heated debate.
But talks broke down along party lines at a White House meeting later in the day, and a late-night meeting of Treasury Secretary Henry Paulson and members of Congress proved unsuccessful.
Talks resumed Friday morning. President Bush spoke briefly after the markets opened, acknowledging the gridlock and also saying that Congress will move quickly on the plan. (Full story)
If the debate spills into next week, that's not a disaster for the markets, but the sooner something is established, the better, said Kenny Landgraf, principal and founder at Kenjol Capital Management.
"The quicker you get something done, the quicker the confidence is restored and the market needs it," Landgraf said.
President Bush, Paulson and Federal Reserve Chairman Ben Bernanke all have said that the struggling economy will be dealt an even bigger blow if a plan is not enacted.
The bank rescue plan would mark the biggest government intervention in the financial system since the Great Depression. It calls for the Treasury Department to buy, hold and eventually sell bad mortgage assets from banks in an effort to get them to lend again and loosen up the credit markets.
The plan also provides help to taxpayers, limits executive pay at participating firms and includes more government oversight. Democrats and House Republicans are reportedly at odds on how to fund the bailout, with some House Republicans arguing that Wall Street should fund the recovery through private capital. (Full story)
Businesses depend on the credit markets to function on a daily basis, and the absence of ready capital has threatened to stall the broader financial system.
Washington Mutual: The savings and loan giant is the latest company to collapse amid the housing market collapse and subprime mortgage crisis.
Federal regulators seized WaMu (WM, Fortune 500) Thursday night and sold its banking assets to JP Morgan Chase (JPM, Fortune 500) in a $1.9 billion deal. The deal also includes JP Morgan raising $10 billion in stock, $2 billion more than initially announced. (Full story)
The collapse was the biggest bank failure in history and marks the second storied Wall Street firm bought by JP Morgan this year, following Bear Stearns in March. The government also negotiated that deal.
Also Friday, the Federal Reserve expanded deal with the European Central Bank and the Swiss National Bank to make an additional $13 billion in funds available to banks overseas. (Full story).
GDP: At the same time as the bank crisis, reports continue to show that economic growth is slowing. The government revised second-quarter GDP growth lower, to an increase of 2.8% from an initial reading of 3.3% a month ago. However, second-quarter growth was still better than the previous two quarters. (Full story)
Bonds: Long-term treasury prices rose Friday, lowering the yield on the benchmark 10-year note to 3.81% from 3.85% late Thursday. Treasury prices and yields move in opposite directions.
The three-month Treasury bill, seen as the safest place to park money in the short term, rose to 0.87% from 0.75% late Thursday. Last week, the three-month bill fell to a 68-year low around 0% as panic gripped financial markets.
And the TED spread, a measure of financial market jitters, dipped to 2.90% after touching a 22-year high on Thursday of 3.37%. The TED spread is the difference between what the Treasury pays to borrow for three months and what banks charge each other. If banks are charging each other a big premium, that's a sign of fear.
Treasury prices have been rallying recently and yields tumbling as nervous stock market investors have looked for safer areas to move their cash.
(For a look at how tighter credit conditions have been impacting individuals, click here.)
Oil and gold: U.S. light crude oil for November delivery fell $3.12 to $104.90 a barrel on on the New York Mercantile Exchange.
Oil prices had plummeted over $55 after peaking at $147.27 a barrel on July 11, as investors bet that sluggish global growth will diminish oil demand. But prices have soared in the last few weeks as the financial crisis has intensified and investors sought to put their money into hard assets.
COMEX gold for December delivery rose $10.50 to $892.50 an ounce. Like oil, gold prices had also rallied during the biggest periods of unrest over the last few weeks
Other markets: In currency trading, the dollar rose against the euro and fell versus the yen.
Gas prices fell for the eighth day in a row, according to a nationwide survey of credit card activity.
