Weakness Persists for Bank Stocks

Bank stocks fell again Tuesday, reflecting growing uncertainty over the government's ability to salvage the financial sector.

The KBW Bank Index fell 3.10%, the Dow Jones industrial average 1.47%, and the Standard & Poor's 500 index 1.56%.

The Senate Banking Committee spent the day grilling Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke about the Treasury's Department's plan to create a facility that would buy up to $700 billion of troubled assets. This "unsettles banks, which are, of course, the subject of the whole hearing," said Gary Townsend, the chief executive of Hill-Townsend Capital LLC.

Bank stocks also dropped Tuesday because of an "unintended consequence" of the Securities and Exchange Commission's ban on short-selling of more than 800 financial stocks, Mr. Townsend said.

"When you look at the restrictions being placed on portfolio managers through the prohibition of short sales, you have many participants unwilling to buy, and" as a result, "many portfolio managers" believe "their only option is to sell," he said.

Citi Investment Research analyst Greg Ketron late Monday downgraded Zions Bancorp's shares to "hold" from "buy" and the shares of Regions Financial Corp. to "sell" from "hold." The stocks' "current valuations were not in line with fundamentals," he said.

In both downgrades, Mr. Ketron wrote that government intervention in the form of the short-selling ban and the proposed relief plan for troubled assets had led to many bank stocks' being overvalued, including Zions' and Regions'. Zions fell 14.2%, Regions 12.1%.

Wachovia Corp. was off 11.1%. Oppenheimer & Co. analyst Meredith Whitney on Tuesday cut her third-quarter estimate for the Charlotte company to a loss of 31 cents a share, from her previous estimate of a 15-cents-a-share loss.

Ms. Whitney also reduced her third-quarter estimates for four banking companies, three of which she expects to be profitable. She now projects that Citigroup Inc. will record a loss of 36 cents a share, compared to her previous estimate of an 8-cents-per-share profit; JPMorgan Chase & Co., net income of 21 cents a share, compared to 40 cents previously; Bank of America Corp., 40 cents a share, compared to 75 cents; and Wells Fargo & Co., 13 cents a share, compared to 17 cents.

Citigroup's stock fell 0.1%, JPMorgan 0.6%; Bank of America 2.5%, and Wells 2.9%.

Ms. Whitney also said that, despite the Treasury Department's plan, home prices will keep dropping and banks will be forced to cut dividends again and raise capital.

"What started last summer has accelerated and intensified so much so that we believe any government bailout plan has little hope of improving core fundamentals over the near and medium term," Ms. Whitney wrote in her note.

Downey Financial Corp. rose 19.3%. Late Monday, the Newport Beach, Calif., thrift company, which has reported four straight quarterly losses under the weight of bad mortgages, said that it had hired Charles Rinehart, the chairman of VeriFone Holdings Inc., to spearhead a recovery.

Mr. Rinehart, 61, was the CFO of H.F. Ahmanson & Co. for five years before Washington Mutual Inc. bought it in 1998.

Other gainers included Fannie Mae, up 65.8%; Freddie Mac, 55.3%; National City Corp., 3%; Pacific Capital Bancorp in Santa Barbara, Calif., 9.3%; and Bay National Corp. in Lutherville-Timonium, Md., 20.9%.

Other decliners included Washington Mutual Inc., off 3.9%; Capital One Financial Corp., 1.3%; State Street Corp., 6.8%; and Bank of Virginia in Midlothian, 21.9%.

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