Stocks Fall on Bank Fears

Major equity indexes slid Monday amid rising worries about the health of major financial institutions

by Ben Steverman

Stock stumbled Monday after a big batch of negative headlines from financial firms raised worries of more turmoil on the credit markets. Oil futures rocketed toward $108 per barrel.

On Monday, the Dow Jones industrial average fell 153.54 points, or 1.29%, to 11,740.15. The broader S&P 500 index dropped 20 points, or 1.55%, to 1,273.37. The tech-heavy Nasdaq composite index shed 43.15 points, or 1.95%, to 2,169.34.

On the New York Stock Exchange, 27 stocks fell for every five moving higher. On the Nasdaq, the ratio was 23 to 7 negative.

A barrage of negative news items on some financial-related stocks continued to heighten worries about credit market disarray.

Shares of Bear Stearns (BSC) fell 11% Monday on worries about its credit problems. The company denied liquidity problems rumored in the market. On Monday, Moody's Investors Service downgraded credit investments backed by Alt-A mortgage loans and issued by the Bear Stearns Alt-A Trust.

"We believe [Bear's] exposure to these downgrades is limited to its owned investments in Alt-A loans", wrote S&P equity analyst Matthew Albrecht in a note Monday. S&P has included expected writedowns to this class of loans in its first-quarter estimates for Bear. Nonetheless, S&P cut its target price on Bear by $10 to $75.

Countrywide Financial (CFC) shares fell 14% on a Wall Street Journal report that said the company is facing an FBI inquiry into whether executives at the giant mortgage lender misrepresented the firm's financial position and the quality of its mortgage loans in filings.

Private-equity outfit Blackstone Group (BX) lost $170 million for the fourth quarter because of the declining value of its investment in bond insurer Financial Guaranty Insurance Co. and deterioration in the credit markets. SHares rose 2.9% in Monday's session.

Fannie Mae (FNM) and Freddie Mac (FRE) were down on a negative Barron's article. Fannie shares fell 13%, while Freddie was lower by 12%.

Lehman Brothers (LEH) announced layoff plans. The shares declined 7.3% Monday.

Meanwhile, Morgan Stanley said in a report that it was cautious on U.S. large-cap banks, including Citigroup (C), Bank of America (BAC), and JPMorgan (JPM). Citi shares fell 5.8%, BofA declined 3.9%, and JPMorgan was down 2.9%.

Wall Street players were also pondering a report that New York Governor Eliot Spitzer was linked to a prostitution ring.

A warning by JPMorgan of a "systemic margin call" on credit markets seemed to be getting traders' attention.

The threat of a U.S. recession also weighed heavily on stocks, as the memory of Friday's especially weak jobs report lingered. The "market still appears to be in the process of discounting a recession [with] much debate over the depth of the economic slide," says S&P's MarketScope.

Some investors are hoping a further drop in interest rates by the Federal Reserve on Mar. 18 could ease problems in the credit and housing markets. "The week ahead will largely provide a transition to the upcoming Fed meeting where another jumbo policy easing now seems assured," says Michael Wallace of Action Economics.

But JPMorgan's fixed income strategy team suggests far more may be needed to combat an "extraordinarily broad-based" decline in home prices that is devastating the mortgage market.

"A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," said the report co-written by analyst Christopher Flanagan and released late on Friday.

Bank capital could take a total hit of "at least $325 billion," the analysts said, and conditions are getting worse.