Scuttlebutt about derivatives losses and lending problems at Bank of America Corp. helped fuel a broad market downturn Friday.

Bank of America’s stock lost more than 7% in the first few minutes of trading Friday, as rumors swirled over losses stemming from derivatives trading and lines of credit to California’s utilities. After trading of B of A was temporarily suspended on the New York Stock Exchange, the Charlotte, N.C., banking company released a statement that said: “We know of no basis to support speculative rumors about our operations. We are conducting business as usual. And the company remains comfortable with its guidance for credit quality in 2001.”

Bank of America resumed trading just after 10:30 a.m., but did not recover. The stock closed down $3.50, or 6.8%, at $48. The American Banker index of the top 50 banks lost 3.16% and its 225-bank index fell 4.92%, while the Standard & Poor’s 500 index dropped 2.62% and the Nasdaq 6.2%.

Financial services stocks that were hit included J.P. Morgan Chase & Co., which fell 6%, to $48.9375, and SunTrust Banks, which fell 3.5%, to $62.9375.

Bank of America had said in December that it expected nonperforming loans would be 20% higher than the $4.4 billion reported on Sept. 30, and said chargeoffs during the fourth quarter would be $1.1 billion to $1.2 billion.

The company “sent shudders through the entire market,” said Adam J. Lewis, senior vice president of listed trading at Keefe, Bruyette & Woods Inc., who like many on Friday was surprised by the market drop.

But analysts said Bank of America was just part of the story. Investors were conducting a reality check and selling higher-risk bank stocks bought during Wednesday’s celebratory trading session after the Fed’s interest rate cut.

“The positive trend of a rate cut and negative sentiment of stagnant earnings make investors nervous,” said Diana Yates at A.G. Edwards & Sons Inc. in St. Louis.

Katrina Blecher, a managing director of research at Sandler O’Neill & Partners, concurred, saying investors were too bullish on Wednesday. “Bank of America poured some cold water over the market,” she said.

Considering how nervous investors got over the flood of bad news, the crucial issue will be how management handles expectations, said Richard Bookbinder, managing member of Bookbinder Capital Management LLC, a fund of funds.

“Execution is key,” he said. “Investors are so uneasy that any rumor can trigger a sharp reaction.”

Though most analysts accepted Bank of America’s stance on its derivatives trading, Lori Appelbaum, an analyst with Goldman Sachs & Co., said the bank’s problem-loans problem could worsen.

A particular investor concern is Bank of America’s outstanding loans to the California utility PG&E Corp., which is in danger of bankruptcy. Its exposure to PG&E probably extends beyond its most recent obligation — a $500 million loan it arranged on Nov. 24 — to include commitments made over the past few years. The utility has been strapped for cash because wholesale prices have risen and 1996 deregulation rules prevent it from compensating by raising retail prices.


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