U.S. bank shares plummet amid stability fears

By Dan Wilchins

NEW YORK (Reuters) - The shares of major U.S. banks plunged on Monday amid fears about the sector's stability following Friday's seizure by regulators of IndyMac Bancorp Inc IMB.N as withdrawals by panicked depositors led to the third- largest U.S. banking failure.

"It's the cockroach theory. You don't just have one bank failure -- when you have a big bank go under, there's always more than one," said James Ellman, president of hedge fund Seacliff Capital, who is short some financial stocks, but also owns some shares of trust banks and asset managers.

The shares of Washington Mutual Inc (WM.N) and National City Corp NCC.N, which have significant exposure to mortgages, plummeted, leading both to issue statements intended to reassure investors and depositors.

Also hurting Washington Mutual shares, Lehman Brothers Inc analyst Bruce Harting wrote that the largest U.S. savings and loan could face $26 billion in losses, with $21 billion from mortgages.

Monday's declines also came a day after the U.S. government pledged emergency support for mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

Washington Mutual shares closed down $1.72, or 34.7 percent, at $3.23, while National City fell 65 cents, or 14.7 percent, to $3.77.

The broader Standard & Poor's Financials Index .GSPF fell 5 percent, dropping to its lowest since October 1998.

As the credit crunch wears on, companies previously seen as strong are looking increasingly frail, investors said.

"The fear factor is in play," said Michael Nix, portfolio manager Greenwood Capital Associates, whose fund owns shares in Wachovia Corp WB.N and regional bank BB&T Corp (BBT.N).

Monday's rout in banking stocks also hurt investment banks. Lehman Brothers Holdings Inc LEH.N declined 14.1 percent to $12.40 and Merrill Lynch & Co MER.N lost 6.3 percent to

$25.88.

The collapse of IndyMac, one of the largest U.S. banking failures ever, was particularly sobering to investors, analysts said. Hundreds of worried customers lined up outside IndyMac branches in California on Monday to withdraw their money.

"We have money we are afraid we are going to lose," said Jitesh Patel, a doctor from Burbank, who took a day off from work to withdraw his money from IndyMac. "I wish we were a little more savvy."

Regulators said the renamed IndyMac Federal Bank will cover insured deposits, mostly up to $100,000, and initially cover 50 percent of uninsured deposits. But that left people with more than $100,000 in the bank particularly anxious.

"I have $360,000 in this bank and I was misled by this bank," said Robert Clark, a Glendale resident. "I gave the names of my mother, my sister and my brother on the account so I thought I would be insured. I don't know what to do. I really don't know what to do."