U.S. stocks tumble on news of AIG's losses

U.S. stocks tumble on news of AIG's losses

A report from Swiss Bank UBS predicting more severe sub-prime mortgage losses also sends shivers across Wall Street.

Go to Original
By Walter Hamilton

The stock market suffered its worst drubbing in almost a month Friday as new troubles in the financial sector suggested that damage from the sub-prime crisis still had a long way to go.

The Dow Jones industrial average slumped more than 300 points after insurance giant American International Group Inc. reported a brutal fourth-quarter loss and a research report predicted that Wall Street's mortgage-related losses would reach $600 billion.

Financial stocks led the way down, as they have for much of the last year.

The developments wiped out recent hopes that the sub-prime fallout was easing, and left some investors with the feeling that economic and market turmoil would persist through at least the first half of the year.

"We are in a process of winding out this great party that they had on Wall Street for this junk that went on for three or four years," said Greg Church, chief investment officer at Church Capital Management in Yardley, Pa., who predicted more pain in the months ahead. "We might be in the fourth or fifth inning. There's more to come."

Also depressing stocks was news that an index of business activity in the Chicago area sank much more than expected last month to its lowest level since December 2001.

The Dow Jones industrial average tumbled 315.79 points, or 2.5%, to 12,266.39. The blue-chip indicator is down 7.5% since the start of the year, but it remains above its recent low of 11,971 reached on Jan. 22.

The Standard & Poor's 500 slumped 37.05 points, or 2.7%, to 1,330.63. It's down 9.4% this year.

Investors continued a mad dash to the safety of Treasury securities. The yield on the two-year note slid to 1.64% from 1.82% late Thursday and 2% late Wednesday. The yield has been cut almost in half from the start of the year, when it stood at 3.06%.

But the upheaval in the municipal-bond market continued as large investors dumped their holdings, pushing yields up, amid rumors that hedge funds were liquidating muni bonds they had bought on credit. The turmoil has eaten into the value of muni-bond funds owned by many individual investors.

Stocks had picked up early in the week when it appeared that the fortunes of beleaguered bond insurers, which have backed billions of dollars in sub-prime securities, were improving. But the enthusiasm was soon overtaken by fears that more sub-prime bombs would go off.

AIG reported a $5.3-billion fourth-quarter loss late Thursday because of a write-down of sub-prime securities in its portfolio. Its shares tumbled $3.29, or 6.6%, on Friday to $46.86.

And a report by analysts at banking giant UBS sent shivers across Wall Street with its prediction that the total sub-prime hit at financial firms would quadruple from about $150 billion now to $600 billion.

"It really is ugly still," said Georges Yared, chief investment strategist at Yared Investment Research in Minneapolis.

"Housing still hasn't bottomed. It has a way to go."

Among the day's market highlights:

* Declining issues outnumbered advancers by about 7 to 1 on the New York Stock Exchange.

* The tech-dominated Nasdaq composite index declined 60.09 points, or 2.6%, to 2,271.48. The Russell 2,000 index of smaller companies fell 19.54 points, or 2.8%, to 686.18.

* For the week, the Dow lost 0.9%, the S&P 500 gave up 1.7%, the Nasdaq fell 1.4% and the Russell 2,000 declined 1.3%.

* An index of financial stocks in the S&P 500 tumbled 4%, putting it down 11% for the month, in response to the UBS report and a Deutsche Bank forecast of further write-downs at Lehman Bros. Holdings and Bear Stearns.

Citigroup dropped $1.30, or 5.2%, to $23.71. Goldman Sachs Group fell $7.07, or 4%, to $169.63. Lehman sank $3.69, or 6.7%, to $50.99. Bear Stearns slid $4.36, or 5.2%, to $79.86.

* Ambac Financial Group fell 66 cents, or 5.6%, to $11.14 on a report that a deal to boost capital at the second-largest bond insurer had hit a snag. Its larger rival, MBIA, fell $1.09, or 7.8%, to $12.97 after saying it was writing "very little" new bond insurance.

* Wells Fargo slumped $1.33, or 4.4%, to $29.23 after recording a $39-million loss on complex debt held by money market funds it manages that it agreed to prop up.

* Oil jumped to a record of $103.05 a barrel in early electronic trading. On the New York Mercantile Exchange, crude futures fell 75 cents to $101.84.

* The dollar finished lower after marking another intraday low against the euro, which traded as high as $1.524. The greenback fell below 104 yen for the first time in three years.

* Trading in interest-rate futures implied a 70% chance of a three-quarter-point rate cut by the Federal Reserve at its March 18 meeting. That was up from 36% on Thursday and 2% last week.

* Overseas stock markets tumbled. Key indexes fell 2.3% in Japan, 1.4% in Britain, 1.7% in Germany and 1.5% in France.

walter.hamilton@latimes.com