S&P downgrades of major banks slam Wall Street

2/06/2008 - 19:11

By Walker Simon

NEW YORK (Reuters) - Stocks slid on Monday on renewed fears the credit crunch has yet to run its course after Standard & Poor's cut its ratings on three big securities firms, Wachovia ousted its chief executive, and a British mortgage lender said the UK home market was in dire straits.

All three major indexes fell more than 1 percent, with the Dow skidding almost 200 points, breaking a four-day winning streak as mounting signs that the credit crisis sparked by the U.S. subprime mortgage woes showed no signs of easing hit financial stocks.

Shares of Lehman Brothers, Morgan Stanley and Merrill Lynch fell sharply after S&P cut its credit ratings of the three banks and said its outlook on large U.S. financial institutions is predominantly negative.

"Basically we went into the session with very negative sentiment coming from Europe due to a British mortgage lender," said David Katz, chief investment officer at Matrix Asset Advisors in New York.

"Then that was compounded by the management changes at Wachovia and Washington Mutual," he added. "Obviously the last leg down was the S&P action on the brokerage firms, which increases the cost of capital."

The Dow Jones industrial average was down 183.60 points, or 1.45 percent, at 12,454.72. The Standard & Poor's 500 Index was down 20.13 points, or 1.44 percent, at 1,380.25. The Nasdaq Composite Index was down 46.94 points, or 1.86 percent, at 2,475.72.

In announcing its credit actions, S&P said in a statement: "The negative actions reflect prospects of continued weakness in the investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters."

Among financial shares, Lehman fell the most, tumbling 7.9 percent to $33.90. Morgan Stanley fell 3.7 percent to $42.60 and Merrill Lynch lost 4.9 percent to $41.78.

S&P also said it may downgrade Wachovia Corp and revised outlooks to negative on Bank of America Corp and JPMorgan Chase. The outlook indicates the likely direction of the rating over the next two years.

JPMorgan Chase fell 1.7 percent to $42.25 and Bank of America was off 1.5 percent to $33.51. Wachovia fell 3.3 percent to $22.96.

Wachovia on Monday said it ousted its chief executive over what it termed "disappointments," including the purchase of a big mortgage lender at the height of the U.S. housing boom.

"The news of a major bank dismissing its chief sent an already jittery market lower," said Brian Gendreau, investment strategist at ING Investment Management in New York. "For months the market has been hypersensitive about any adverse news about the financial sector."

IN addition, Washington Mutual, the largest U.S. savings and loan, which has been slammed by the mortgage slump, said on Monday that it would strip Chief Executive Kerry Killinger of his title of chairman starting next month. Its shares fell 1 percent of $8.93.

Also on Monday British mortgage lender Bradford & Bingley. reported losses and said the UK mortgage market was sharply deteriorating. Its shares fell 24 percent.

General Motors bucked the trend in U.S. stocks, gaining 1.4 percent to $17.33 after the weekly business newspaper Barron's said shares of the U.S. automaker could triple over the next few years.

(Editing by Leslie Adler)

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