Morning Update

TheMother of All Bailouts"

In the December Globex futures contract as of 8:33 a.m. ET, the S&P 500 Index is 10 points above fair value, the Nasdaq 100 Index is 11 points above fair value, and the DJIA is 97 points above fair value. Crude oil is up $2.53 to $109.14 per barrel, and gold is up $7.70 per ounce at $898.90.

Berkshire Hathaway (BRKA $128,800) announced it will buy $5 billion of preferred stock in Goldman Sachs (GS $125) with a yield of 10%, and it will also receive warrants to buy $5 billion in common stock at a price of $115 per share, exercisable over the next five years. Goldman will also raise at least $2.5 billion in a common equity offering. In an interview on CNBC, Buffet said he would not be doing the deal if he felt the Congress would not pass the bailout bill before lawmakers.

More from Bernanke and Paulson

Ben Bernanke and US Treasury Secretary Henry Paulson will go back to Capitol Hill and testify at 2:30 p.m. ET in front of the House Financial Services Committee and answer more questions about the $700 billion rescue plan. Bernanke and Paulson came under fire yesterday over the finer points, the cost, and its potential effectiveness. They will continue to press Congress for a quick approval to calm financial markets. Passage of the bill is still expected but worries over potential delays are rising.

Prior to their testimony, Bernanke will testify on the economic outlook before the Joint Economic Committee at 10:00 a.m. ET. He emphasized yesterday that markets are under extraordinary pressure and failure to pass the Treasury's plan will adversely affect the economy.

Meanwhile the Federal Reserve announced early this morning that it has authorized new swap lines with central banks in Australia, Norway, Sweden, and Denmark totaling $30 billion, which is on top of the $247 billion previously authorized. Though the overnight dollar Libor lending rate continues to ease, it remains elevated. The three-month Libor rate, however, jumped 27 basis points to 3.48%, its highest level since January. Credit markets clearly remain under pressure.

Existing homes sales will be out at 10:00 a.m. ET. Sales in August are forecast to decline 1.2% to an annual rate of 4.94 million units, signaling that the housing market remains bogged down by uncomfortably high inventory levels and declining home prices.

Europe off early highs

In front of testimony by Bernanke and Paulson later today, European markets have retreated from early highs as a larger-than-expected drop in German business confidence pressures the backdrop. Fears that the rescue package may get bogged down in Congress are also contributing to the afternoon weakness.

The Ifo Institute of business confidence fell from 94.8 in August to 92.9 in September, the fourth-straight decline and worse than the forecast of 94.3. The crisis in the credit markets, tighter credit conditions, stalled economic activity, and still-high interest rates with no signs of relief all conspired to push sentiment to the lowest level in over three years. Coupled with weakness in the PMI Indexes reported yesterday, falling business confidence suggests that a rebound that the central bank has predicting by the end of the year may be a bit optimistic. The faltering economy may eventually force policymakers to alter their stance on monetary policy.

Stocks did receive an early boost from Buffet's plan to invest in Goldman Sachs and a deal by state-run Electricite de France (ECIFF $73), the world's largest manager of nuclear plants, to buy British Energy Group (BEYGF $13) for 12.5 billion pounds, or about $23 billion. The UK owns 35% of British Energy and had announced earlier in the year that it planed to sell the stake. Shares of both companies are higher.

Banks boost Tokyo

Financials in Japan helped the Nikkei 225 Index recover from early losses as Buffet's investment in Goldman Sachs instilled confidence in the sector. A report by Kyodo news that Sumitomo Mitsui Financial Group (SMFJY $6), the third-largest bank in Japan, might contribute anywhere from 100-300 billion yen also helped confidence. The Wall Street Journal, however, said that Sumitomo has not been asked but would consider an investment if Goldman makes such a request. None of the parties involved commented. Meanwhile, Nomura Holdings (NMR $13), the largest brokerage firm in Japan, finished up over 5% after announcing it will buy investment banking operations of Lehman Brothers (LEHMQ $0.13) in Europe and Asia.