Small caps extend losses after Paulson redirects TARP funds

Small-cap stocks extended the opening slide after Treasury Secretary Henry Paulson suggested that the government’s initial plan to rescue our fragile financial system by scooping up bad debt off the books of financial firms wasn’t that great of an idea after all. A lack of confidence in the rescue plan simply added to existing jitters about the economy and the corporate profit outlook. At 12:16 p.m. ET, the Russell 2000 (NYSE:IWM) was down 18.46, or 3.83%, at 463.83.

Paulson said that the government was moving toward another round of capital injections into financial institutions, scrapping the original “rescue” of buying up toxic debt as a way to utilize the $700 billion in funds targeted to rescue the market from the credit crisis. Fair or not, the immediate reaction from stock market investors to the news was that they seemed to see the announcement as another sign of a wishy-washy, “putting out fires” approach to the crisis instead of a well-thought, well-executed approach to the problems at hand.

Treasury markets rallied as equity markets tumbled, reflecting flight toward “safe haven” outlets and away from stocks. The yield on benchmark 10-year notes fell 2%. Yields move inverse to price, so the slide on yields reflected demand for the 10-year note product. The U.S. dollar was down mildly against the euro, but absolutely tanking against the Japanese yen, losing some 2.1%.

Individual small caps on the slide today included Wimm-Bill-Dann Foods OJSC (NYSE:WBD), as Russia’s largest dairy company tumbled 24% on news that ratings agency Moody’s downgraded the firm’s debt. Pretty much anything linked to Russia right now is trouble as the Russian Micex Stock Exchange closed for . . .

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