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Market drops as financial shares slide

7/07/2008 - 19:30

By Kristina Cooke

NEW YORK (Reuters) - Stocks fell sharply on Monday, as shares of financials fell on concerns they may have to raise more capital and as a retreat in the price of oil from record highs weighed on energy shares.

All three major U.S. stock indexes were down about 1 percent, with the S&P 500 trading in bear market territory. To confirm a bear market the benchmark index would have to close down 20 percent from its October closing highs.

Concerns Fannie Mae and Freddie Mac , the largest providers of funding for U.S. home mortgages, may need to raise more capital amid larger-than-expected losses, sent their shares sharply lower and weighed on the financial sector. Fannie Mae plunged 18 percent, while Freddie Mac slid 21 percent.

Adding to capital-raising concerns, San Francisco Federal Reserve President Janet Yellen said in a speech it was important that more capital flow into the financial sector, including money from private equity sources.

"There's all this talk about capital raising; that's going to feed on itself and it seems like it's never ending. Whenever you think it's done someone else comes out and says they think financials have to raise more and that's obviously going to dilute their share price," said Neil Massa, senior U.S. trader at MFC Global Investment Management in Boston.

Exxon Mobil and other big energy companies fell as U.S. crude oil dropped more than $4 to $142.07 a barrel after the dollar touched a 1-1/2-week high against other major currencies. Oil hit a record of $145.85 last week.

The Dow Jones industrial average <.DJI> was down 112.68 points, or 1.00 percent, at 11,175.86. The Standard & Poor's 500 Index <.SPX> was down 17.63 points, or 1.40 percent, at 1,245.27. The Nasdaq Composite Index <.IXIC> was down 19.91 points, or 0.89 percent, at 2,225.47.

If the S&P 500 closes below 1,252.12, it would join the Dow and the Nasdaq in a bear market.

Concern that Freddie Mac could see greater losses from mortgage insurance was fueled on Monday after research firm CreditSights said mortgage insurer Radian could face more downgrades, forcing it to wind down its existing business. That increases risks for Freddie Mac, which had $63 billion of loans or pools of loans backed by Radian as of March 31. A pending accounting change could also force Freddie Mac and Fannie Mae to boost capital by an additional $29 billion and $46 billion, respectively, according to Lehman Brothers.

A Freddie Mac spokeswoman said the company does not intend to raise capital until it announces second-quarter earnings, and declined to comment on its ability to raise capital as shares fall.

Lehman Brothers fell 9.2 percent to $20.75. Sources close to the matter said energy pricing agency Platts put Lehman under a temporary review that in effect excludes the company from trading certain oil contracts.

SunTrust Banks Inc shares tumbled to their lowest in more than 12 years after a Friedman, Billings, Ramsey & Co analyst on Monday said the U.S. southeast regional bank may suffer significant losses from residential construction lending. Shares of SunTrust fell 10.5 percent to $31.27.

An S&P index of financial shares <.GSPF> was down 4.4 percent, with most of the sub-index's components in the red. JPMorgan Chase shares dropped 4.4 percent to $33.75 and Citigroup fell 5.2 percent to $15.95.

A nearly 12 percent jump in Yahoo's stock on hopes for new talks with Microsoft Corp stirred enthusiasm for technology shares but was not enough to keep an early rally on track.

Microsoft's shares fell 1.5 percent, and were among the top drags on the Nasdaq 100, after it said it is interested in resuming deal talks with Yahoo if the Internet company elects a new board at its August 1 shareholders' meeting. The news is seen as a major boost to activist shareholder Carl Icahn's board slate for Yahoo.

Teva Pharmaceutical Industries Ltd was the top drag on the Nasdaq 100 after data from a late-stage trial showed an increased dose of its multiple sclerosis drug was not more efficient than an approved lower-dose version. Shares of Teva fell nearly 10 percent to $42.57.

With the drop in oil, an S&P index of energy shares <.GSPE> was down 2.7 percent. Exxon Mobil shares fell 1.5 percent to $86.91.

In economic news, the Conference Board said there is little reason to expect the U.S. labor market to recover soon after the group's Employment Trends Index fell in June.

(Editing by James Dalgleish)

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