Bank stocks fell Wednesday as more companies reported weakened third-quarter earnings as a result of higher credit costs.

The KBW Bank Index fell 5.79%.

"I don't think anybody was shocked about the tenor of earnings reports coming out so far," said Peter McCorry, a senior trader at KBW Inc.'s Keefe, Bruyette & Woods Inc. "Coming out of this, we'll see the haves and have nots, and we'll see some pickup in M&A activity in the coming year."

The broader markets also fell as earnings drops were reported across all industries. The Dow Jones industrial average fell 5.69%, and the Standard & Poor's 500 fell 6.1%.

Wachovia Corp. stock fell 6.2%. To clean house before selling itself to Wells Fargo & Co., the $764.4 billion-asset Charlotte company recorded a staggering third-quarter loss of $23.9 billion, or $11.18 a share. The loss included a litany of hits, the biggest being a $18.8 billion goodwill charge largely associated with the 2006 purchase of Golden West Financial Corp.; 63% of the impairment came from the business line that houses Golden West's legacy pick-a-payment mortgage book.

The results also included $2.5 billion of losses tied to the investment portfolio and structured products, $682 million of valuation declines from principal investing, $515 million of severance costs, $497 million of costs from settling auction-rate securities issues, and $397 million from planned securities losses.

Wachovia lost $9.1 billion in the second quarter and earned $1.6 billion a year earlier.

Wells' stock declined 4.1% on the news.

Downey Financial Corp. fell 7.9%. The $13.3 billion-asset Newport Beach, Calif., company said its third-quarter loss more than tripled from a year earlier, to $81.1 million, or $2.89 a share.

The loss, Downey's fifth in as many quarters, was reported a week after it said it would cut 200 jobs by eliminating its wholesale lending unit and scaling back its in-house lending.

With nonperforming assets mounting and its Tier 1 capital ratio at 7.48%, analysts said a fire sale increasingly appears to be Downey's only viable option. Finding a buyer would be complicated by the fact that only a few large U.S. banking companies have both the wherewithal to make big acquisitions and an interest in growing in California.

TCF Financial Corp. fell 6.7%. The $16.5 billion-asset Wayzata, Minn., company said its third-quarter net income fell 49% from a year earlier but rose 27% from the second quarter, to $30.1 million, or 24 cents a share, which fell 5 cents short of the average estimate of analysts polled by Thomas Reuters.

The provision for credit losses nearly tripled from a year earlier but fell 17% from the second quarter, to $52.1 million. Chargeoffs more than doubled from a year earlier but were flat from the second quarter, at $30 million.

Marketing expenses unexpectedly doubled from a year earlier, to $12.3 million. TCF also recorded a $4.1 million increase in severance and separation costs, which included costs related to Lynn Nagorske's abrupt retirement as the CEO in July.

Bank of America Corp. fell 5.5%. Citigroup Inc. dropped 6.1%. JPMorgan Chase Co. fell 6.5%. U.S. Bancorp dropped 6.9%. Fifth Third Bancorp dropped 3.6%. Regions Financial Corp. fell 5%, and National City Corp. fell 6%.

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