Stocks Sink as Banks Skid

Dow Industrials, S&P 500 Skid More Than 4%

Stocks plunged Thursday, led by financial names plagued by the specters of nationalization and insolvency.

Investors also reacted to a lack of economic stimulus in China, and braced for the approaching release of employment data likely to show a fourteenth straight month of job losses in the U.S. As in the darkest days last year, some funds unloaded shares to raise cash in anticipation of a wave of investor redemptions.

The Dow Jones Industrial Average tumbled 281.40 points, or 4.1%, to 6594.44, its lowest close since April 15, 1997. The blue-chip measure has fallen 53.4% from its record high in October 2007 and is down 42.3% since mid-September, when the meltdown of Lehman Brothers Holdings set off a full-blown financial and economic crisis.

The S&P 500 fell 4.3% to 682.55, a new bear-market low. All of its sectors suffered big declines, led by a 9.4% plunge in the financial category.

Citigroup shares dropped 9.7% after dipping below $1 for the first time. In May 2007, Citi was the biggest bank in the U.S. by market capitalization, and traded north of $55. Since then, the collapse of mortgage securitization and the slide in value of other assets has necessitated the rescue of Citigroup and other financial institutions.

"If you had told me in the summer of 2007 that it would dip below $1, I would have said 'you're crazy,'" said Joseph Saluzzi, co-founder of Themis Trading. "The banks are a disaster."

Art Hogan, chief market analyst at Jefferies & Co., said that many traders were shorting Citi's common stock while buying its preferred shares on Thursday, expecting that the government will buy up more of the latter and take an even deeper role in managing the bank's affairs.

Also spurring the downward spiral, Moody's Investors Service said Wednesday that it may downgrade the credit rating of Wells Fargo and changed its outlook on J.P. Morgan Chase to negative. Wells Fargo shares slid 16%, while J.P. Morgan declined 14%. Bank of America fell 12%. U.S. Bancorp sank 18%.

"All the major banks are basically insolvent at this point," said David P. Prokupek, chief executive of the Denver portfolio-management firm Geronimo Partners. "Until that changes and until credit gets flowing again, it's hard to see how we have any real recovery."

Mr. Prokupek said that his firm has lowered the weighting of stocks in its client portfolios to about 5% of assets, down from a high of about 15% last year. It's been stocking up on debt issued by low-risk, government-chartered entities like Fannie Mae, eschewing even the high-grade corporate debt that many money managers have been using as an alternative to the stock market lately.

"We're still skeptical that a lot of that stuff could be lowered below investment grade," said Mr. Prokupek.

Traders said the current plunge differs from that in October and November in that exasperation has replaced panic. After so much pain, many investors are becoming averse to stock trading altogether.

Associated Press

A broker works the trading floor of the New York Stock Exchange March 5.

The Chicago Board Options Exchange market volatility index, which reflects the price of protecting against swings in the S&P 500, has been muted, rising 6% to 50.37 on Thursday. Last fall, it had neared 80. Trading volumes have not come close to the records of October. Mr. Saluzzi said he has hardly heard from clients Thursday.

Ben Pace, chief investment officer for Deutsche Bank Private Wealth Management said he's concerned about a recent re-tightening of three-moth Libor rates, a key benchmark for bank-to-bank lending. He said that trend has not only made life difficult for Wall Street firms, but it is also short-circuiting the multiplier effect from the Federal Reserve's rate cuts.

Three-month dollar Libor peaked at 4.8175% in October. It fell to 1.08250% in mid-January but has steadily crept back up amid frustration in the markets that the Obama administration hasn't offered a detailed plan for valuing toxic assets. On Thursday, three-month Libor stood at 1.28375%.

"I'm not saying things are totally frozen, as they were in the fall," said Mr. Pace. "But they're not totally thawed either. Credit isn't flowing like water."

Investors pushed GM shares down 15% to less than $2 after it said in a securities filing that auditors raised substantial doubt about the auto maker's ability to continue operating. The warning was a stark reminder of an issue that was on the "backburner" for a while, Mr. Saluzzi said.

"There's always something new, or something to drag out from the storage room," he said.

Markets had snapped a five-session losing skid on Wednesday amid hopes that an economic stimulus plan from China would jolt the global economy back to life. Commodities and industrials shares surged. But those gains evaporated on Thursday after China's premier tamped down expectations for more stimulus. The S&P's industrial, basic-materials and energy sectors fell 3% or more.

The Nasdaq Composite Index fell 54.15 points, or 4%, to 1299.59, the lowest close for the tech-heavy measure since March 12, 2003. The Nasdaq is down 54.55% from its multi-year high of 2859.12 hit on October 31, 2007.

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