News of the $3.5 billion bailout of Long-Term Capital Management LP rocked bank stocks, as investors worried that the giant hedge fund's troubles might be just the tip of the iceberg.
Investors dumped shares of banking companies with global trading businesses that might do business with hedge funds.
Shares of BankAmerica Corp. plunged $5.25, to $60; Bankers Trust $3.65, to $64.4375; Citicorp $5.625, to $99.875; and J.P. Morgan $5.9375, to $87.1875.
The announcement of the bailout also raised fears about the overall well-being of the financial services industry, and smaller banks were caught up in wave after wave of selling.
First Union Corp. shares lost $2.5625, to $54.875; Fleet Financial Group $3.625, to $76.1875; Mellon Bank Corp. $2.8125, to $57.875; and National City Corp. $3.6875, to $68.9375.
"It's shoot now and ask questions later," said R. Harold Schroeder, a banking analyst at Keefe, Bruyette & Woods Inc.
The Standard & Poor's bank index dropped 4.77% and the Nasdaq bank index, which is heavily weighted with smaller bank and thrift stocks, fell 1.63%. The Dow Jones industrial average lost 1.87%, and the S&P 500 shed 2.19%.
Analysts pointed to several areas of concern that were sending bank investors to the sidelines.
"One question is, 'What is big institutions' direct exposure?'" Mr. Schroeder said. "Also, is there any fallout to the financial services industry overall?"
Though information was sketchy, some analysts predicted further hits.
Big banks and investment firms "have lent hedge funds hundreds of millions of dollars," said Lawrence Cohn, research director at Ryan, Beck & Co. "Certainly I would expect chargeoffs."
But analysts said it was hard to gauge the fallout on Thursday. "I can't find any bank that knows its exposure," Mr. Cohn said. "And that is troubling."
Analysts also said they were perplexed that the troubles developed. At issue were margin loans where borrowers put up collateral.
"These kinds of loans are so routine," Mr. Cohn said. "I'm beginning to wonder if they slipped through the cracks."
A number of analysts said they expected the problems to go deep. "It demonstrates systematic weakness," said Carla D'Arista at Friedman, Billings, Ramsey & Co.
The incident would likely prod the Federal Reserve Board to lower interest rates as a way of shoring up financial institutions, Ms. D'Arista said.
Other responses were tempered.
"While there may be nervousness in the marketplace, I think fallout from this one will dissipate over time," said Mr. Schroeder of Keefe Bruyette.
"The big question is how much more is out there," said Ben Crabtree, a banking analyst at Dain Rauscher Wessels. "Are banks now going to be buffeted by this?"