Wall Street tumbles as investors dump financials .
AP, 33 mins ago
Investors grew fearful Monday that a recovery by the nation's biggest banks could be endangered by rising levels of bad debt.
Stocks fell sharply Monday after Bank of America Corp. said it set aside $13.4 billion to cover bad debts even as it posted earnings that came in ahead of expectations. Other big banks have also put up similar increases in provisions for soured loans as they reported results in recent weeks.
Major market indicators tumbled more than 3 percent, including the Dow Jones industrial average, which fell 250 points.
Traders had been looking for some pullback after the Dow Jones industrial average jumped 24 percent from 12-year lows in early March, led largely by a recovery in banking stocks.
Renewed worries about the stability of banks appeared to be triggered by news reports that their lending remains tight and that the government may swap its debt in banks for ownership stakes as its $700 billion bailout fund runs down.
Because of the central role lending plays in keeping businesses of all kinds going, investors have been looking closely for signs of a recovery in banks before they getting optimistic about the broader economy.
The market has been encouraged by early indications that a government drive for lower interest rates has been helping banks step up lending, but investors are still very sensitive about any signs of potential trouble with banks. Currently they're on high alert about what the government will say in two weeks when it reports results of in-depth examinations of banks to see which ones might need more help to stay afloat if the economy gets even worse.
Energy and materials companies also fell along with the prices of key commodities they rely on such as crude oil.
The market declines were broad and deep, outweighing what would otherwise be positive news about a step-up in deal activity. After a deal with IBM didn't work out, troubled technology company Sun Microsystems found a buyer in Oracle, a leading maker of business software, while PepsiCo said it would bid $6 billion to buy its two biggest bottlers.
Joe Saluzzi, co-head of equity trading at Themis Trading LLC, said traders are now viewing bank earnings with more skepticism amid concerns that even the better-than-expected results are disguising problems. Income from trading and low-cost borrowing rates have boosted results but not erased more difficult problems with bad debt, he said.
"They're looking at bank numbers and are saying they are not that great," Saluzzi said.
In early afternoon trading, the Dow fell 231.30, or 2.8 percent, to 7,900.03.
Broader stock indicators also lost ground. The Standard & Poor's 500 index fell 29.53, or 3.4 percent, to 840.07, and the Nasdaq composite index fell 58.45, or 3.5 percent, to 1,614.62.
About 10 stocks fell for every one that rose on the New York Stock Exchange, where volume came to 756.3 million shares.
Concerns about the sustainability of bank earnings weighed on financial stocks. Bank of America fell 19.4 percent. Citigroup Inc. lost 19.3 percent, while JPMorgan fell 6.9 percent.
Jeffrey Frankel, president of Stuart Frankel & Co. in New York, said the retreat in financial stocks is welcome after their sharp rise from early March since rising too quickly could endanger their gains. Many bank stocks have doubled in only weeks.
"These banks have had a tremendous run," Frankel said. "Now you're hearing the bearish camp speak up a little bit."
Investors are also cautious about financials after The New York Times reported that the government might be forced to find ways to stretch the $700 billion allocated for the government's bank rescue fund by converting the government's loans into common stock. Such a move would give the government a controlling stake in banks and hurt existing shareholders by reducing the value of their shares.
Separately, The Wall Street Journal reported that banks receiving government bailout money are having a hard time making loans.
Wall Street was more upbeat about the Oracle deal, which carries a 42 percent premium to Sun's Friday closing stock price of $6.69. Sun jumped 36.3 percent, while Oracle slipped 1.6 percent.
Beverage and snack maker PepsiCo Inc. offered to acquire Pepsi Bottling Group and PepsiAmericas in an effort to cut costs. Pepsi lost 4.9 percent, while Pepsi Bottling and PepsiAmericas both jumped more than 20 percent.
In earnings news, drug maker Eli Lilly & Co.'s first-quarter earnings rose 24 percent on higher sales of the antidepressant Cymbalta and as costs for Humalog, a form of insulin Lilly makes, remained flat. Shares slipped 1.7 percent.
Hasbro Inc. fell 3.6 percent after the nation's second-largest toy maker said first-quarter profit fell 47 percent because of a stronger dollar and as retailers reduced inventory levels.
Investors are parsing earnings for information on the direction of the economy. Since March, figures on home sales, manufacturing, retail sales and even unemployment have signaled that the economy might not be worsening as quickly as it had been earlier in the year.
Light, sweet crude fell $4.10 to $46.23 a barrel on the New York Mercantile Exchange.
Occidental Petroleum Corp. lost 6.1 percent, while Dow Chemical Co. fell 8.9 percent.
In other market moves, the Russell 2000 index of smaller companies fell 25.30, or 5.3 percent, to 454.07.
Bond prices showed little movement, leaving the yield on the 10-year Treasury note flat at 2.84 percent from late Friday. The yield on the three-month T-bill was unchanged at 0.13 percent.
The dollar was mixed against other major currencies, while gold prices rose.
Overseas, Japan's Nikkei stock average rose 0.19 percent. Britain's FTSE 100 fell 2.5 percent, Germany's DAX index fell 4.1 percent, and France's CAC-40 fell 4 percent.
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