Investors Flee From Banking Stocks

National City, Wachovia Plummet

A day after the collapse of the nation's largest thrift, Washington Mutual, investors scurried yesterday from the stocks of Wachovia, National City and other banks with large portfolios of troubled loans, as concerns were rekindled that those banks have yet to acknowledge the full extent of their probable losses.

The stock market's major indicators climbed modestly on hopes that Congress will approve a big-dollar bailout for the financial system. The Dow Jones industrial average gained 121.07 points, or 1.1 percent, to close at 11,143.13, recouping about a third of its losses from earlier in the week.

But that broader confidence did not extend to Wachovia, whose shares lost 27 percent of their value yesterday, or to National City, which was down nearly 26 percent. The combined declines erased about $10 billion in shareholder value.

Investors also sold off Wachovia's bonds and bought insurance against the possibility of a default on those bonds. The cost of insuring a Wachovia bond against default soared as high as one-third of the value of the bond itself. At these prices, buyers were paying more for the insurance than they would earn from the bond.

Donn Vickrey, co-founder of Gradient Analytics, an independent research firm, said investors are punishing companies that hold high-risk mortgage loans.

"The ones that are the most vulnerable are the ones that have engaged in the most creative lending," Vickrey said.

Washington Mutual was seized by the government Thursday after depositors withdrew billions of dollars, leaving the Seattle mortgage lender short on cash. Much of the company was immediately sold to J.P. Morgan Chase, but the terms of the sale have frightened investors in other troubled banks.

Commercial banks were previously regarded as unlikely to fail during the current crisis because their ample deposits offer a source of funding even if they cannot borrow from investors.

Now it is clear that a run on those deposits can destabilize even a large bank and that the government will act swiftly to shutter such an institution, putting concerns about the stability of the financial system and the security of deposits above the interests of investors.

In the case of Washington Mutual, shareholders and bondholders are likely to be left empty-handed.

"Now it's clear that you could get wiped out if you invest in the wrong bank," said Ed Fredericks, a finance professor at Pepperdine University. "That's what really rattled the market today. It's the understanding that if Wachovia does go into financial distress, the FDIC might do the same thing they did with Washington Mutual."

Also, J.P. Morgan immediately marked down the value of Washington Mutual's mortgage-related investments by $31 billion, suggesting that similar assets at other banks are being held at highly inflated values.