By Kristina Cooke
NEW YORK (Reuters) - Stocks fell on Monday on concerns that the top two mortgage providers would have to raise even more capital, severely devaluing existing shareholders' stakes, while big energy companies fell along with oil prices.
In a volatile session, the major indexes swung from gains at the open to steep losses by mid-afternoon. A late clawback that brought the Dow, Nasdaq and S&P 500 briefly into positive territory ran out of steam in the final minutes, leaving the S&P 500 within 1 point of an official bear market. The Dow and Nasdaq are already in confirmed bear markets.
U.S. bank stocks plummeted to their lowest level in a decade after Lehman Brothers estimated that a proposed accounting rule would force Fannie Mae and Freddie Mac,
already battered by the subprime mortgage crisis, to raise as much as $75 billion between them.
A warning from regional bank Marshall & Ilsley added to signals that the second-quarter earnings reporting season would be tough for the financial sector.
"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.
Adding to the negative tone, San Francisco Federal Reserve President Janet Yellen sounded a cautious note on the economy, saying the risk of inflation is beginning to outweigh the risk of a deteriorating U.S. economy. That indicates the Fed could be leaning toward raising rates.
Exxon Mobil and other big energy companies fell as U.S. crude oil dropped nearly $4 to settle at $141.37 a barrel after the dollar touched a 1-1/2-week high against other major currencies. Oil hit an intraday record of $145.85 a barrel last week.
The Dow Jones industrial average fell 56.58 points, or 0.50 percent, to 11,231.96. The Standard & Poor's 500 Index slid 10.59 points, or 0.84 percent, to 1,252.31, while the Nasdaq Composite Index slipped 2.06 points, or 0.09 percent, to 2,243.32.
Concerns that 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 to their lowest level since 1992. Fannie Mae plunged 16.2 percent to $15.74, while Freddie Mac slid 17.9 percent to $11.91.
Analysts at Lehman Brothers wrote in a note to clients that a pending accounting change could force Freddie Mac and Fannie Mae to boost capital by an additional $29 billion and $46 billion, respectively. In addition, 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.
Several Wall Street brokers reversed their 2008 forecast on Wisconsin's largest bank Marshall & Ilsley Corp to a loss, after the company said it expects a huge second-quarter loss due to increased provision for bad loans. Marshall & Ilsley's stock fell 11.6 percent to $12.50.
SunTrust Banks Inc shares tumbled to $30.92, their lowest in more than 12 years, after a Friedman, Billings, Ramsey & Co analyst on Monday said the southeastern U.S. regional bank may suffer significant losses from residential construction lending. SunTrust's stock lost 9.1 percent to close at $31.74 on the New York Stock Exchange.
Lehman Brothers fell 8.8 percent to $20.84. 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.
An S&P index of financial shares was down 3.2 percent, with most of the sub-index's components in the red. JPMorgan Chase shares dropped 3.6 percent to $34.04 and Citigroup fell 2.5 percent to $16.40.
On the positive side, Yahoo's stock jumped 12 percent to $23.91 on Nasdaq as hopes for new talks with Microsoft Corp stirred enthusiasm for technology shares. But that was not enough to keep a rally on track.
Microsoft 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. Microsoft gained 0.2 percent to $26.03 on Nasdaq.
In contrast, 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. Teva shares fell 8.5 percent to $43.18.
With the drop in oil, an S&P index of energy shares was down 2.3 percent. Exxon Mobil shares fell 1.5 percent to
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.
Trading was moderate on the New York Stock Exchange, with about 1.52 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.37 billion shares traded, above last year's daily average of 2.17 billion.
Declining stocks outnumbered advancing ones on the NYSE and Nasdaq by about 2 to 1.
(Editing by Jan Paschal)