Markets Show Modest Declines, But Big Bank Stocks Nose-Dive

Traders on the floor of the New York Stock Exchange. The Dow Jones industrial average fell 45 points.
Traders on the floor of the New York Stock Exchange. The Dow Jones industrial average fell 45 points. (By Jeremy Bales -- Bloomberg News)
By Renae Merle
Washington Post Staff Writer
Tuesday, July 15, 2008

A federal plan to bolster mortgage giants Fannie Mae and Freddie Mac brought some relief to the stock market yesterday, but the modest declines in the major indicators masked the continuing turbulence in financial shares.

Investors remain concerned about losses at District-based Fannie Mae and McLean-based Freddie Mac and that the federal takeover of IndyMac, the third-largest U.S. bank failure, could signal that other banks and financial services firms are at risk. Investors are navigating a week of deep uncertainty, analysts said, as the Fed's actions are digested by the market and a series of financial companies report earnings.

After losing nearly half their value last week, Fannie Mae's and Freddie Mac's shares gained in early trading before closing down 5 percent and 8 percent, respectively.

"I think we're too early in the process to know whether what the federal government is doing will be both necessary and sufficient to stem the crisis," said Joseph Brusuelas, chief U.S. economist at Merk Investments. "There are too many moving parts."

The Dow Jones industrial average climbed more than 100 points before ending the day down 45.35, or 0.41 percent, at 11,055.19. The broader Standard & Poor's 500-stock index slid 11.19 points, 0.9 percent, to 1228.30. The technology-oriented Nasdaq composite index lost 26.21 points, 1.17 percent, to close at 2212.87.

The financial sector took another beating yesterday as concern mounted over the vulnerability of regional banks in areas hit hard by the housing downturn, analysts said. The pressure on financial stocks is "almost unmerciful," said Andy Brooks, head equity trader at T. Rowe Price in Baltimore. "There is a lot of anxiety, and it is being fueled by a lot of people. For those of us who are longer-term investors, it's been a challenging time."

Trading in National City, a Cleveland-based bank, was halted early yesterday after the price fell more than 20 percent. In a statement, the bank said its capital position was strong. Its stock closed down 15 percent on the New York Stock Exchange after trading resumed.

Washington Mutual plunged 35 percent, and Wachovia dropped 15 percent.

"There is a general expectation that we're going to see more failures," said Bert Ely, a banking consultant in Alexandria. "The big question is how many more and how many biggies will there be."

Also unnerving investors, analysts said, are earnings reports scheduled this week from J.P. Morgan Chase, Merrill Lynch and Citigroup. Any unexpectedly large losses could signal that the sector has yet to purge risky mortgages.

Analysts expect S&P 500 companies to report a 14.7 percent decline in profit during the second quarter, which would mark the first time since 2002 that the S&P has recorded four consecutive quarters of negative growth, according to Thomson Reuters. That is being driven by declines in financial services, a sector that is expected to report losses of $18.6 billion for the quarter.

The problems facing Fannie Mae and Freddie Mac are far from resolved, and investors are nervous about the secondary effects of the housing-market downturn, which may not have revealed themselves, said Doug Roberts, an analyst with Channel Capital Research. "They did not resolve the problem; they dealt with damage control," he said. "We know the patient is not going to die, but what is the eventual outcome? Is he going to loose a leg?"

Staff writer Chris Twarowski contributed to this report.

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