Bond insurer fears sink market

By Ellis Mnyandu

NEW YORK (Reuters) - Stocks fell on Wednesday, reversing strong gains after the Federal Reserve slashed interest rates, roiled by fresh worries about more losses in the financial sector on fears big bond insurers will lose their top credit rating.

CNBC's Charles Gasparino, the business channel's on-air editor, said he believed that the two biggest bond insurers will lose their top credit rating. His remarks, which came in the last hour of trading, knocked down major indexes from nearly 1.5 percent gains wracked up after an aggressive 50 basis point interest rate cut by the Fed.

Shares of top bond insurers Ambac Financial Group Inc and MBIA Inc each finished down more than 10 percent, which contributed to financial shares ending among the day's worst performers.

"Once he (Gasparino) started talking, we got the sell-off. As soon as that went across, those shares went down immediately," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

A credit downgrade of bond insurers could further harm the banking sector and stunt the global economy as financial institutions take a hit from subsequent write-downs of their assets.

CNBC later posted a story on its Web site saying "it had learned" of possible bond insurer downgrades by Wall Street ratings agencies, without citing any source.

There was more turbulence in after-hours trade.

U.S. stock index futures slid after ratings agency Standard & Poor's said after the market's close that credit losses for financial institutions could eventually swell to more than $265 billion.

In addition, S&P said it cut or may cut its ratings on up to $534 billion of subprime bonds.

Shares of banks extended declines after the bell following the S&P statement. Shares of Citigroup Inc fell 1.3 percent after ending in regular trading at $27.87 on the New York Stock Exchange.

"The Fed can do all they want but the problems are baked in the cake. There's nothing anyone can do to change that fact," said Jim Awad, chairman of W.P. Stewart Asset Management in New York. Gasparino's report "brought back all the worries about asset write-downs and credit worries. All that stuff we'd started to ignore based on the stimulus plan."

In regular trading, the Dow Jones industrial average finished down 37.47 points, or 0.30 percent, at 12,442.83. The Standard & Poor's 500 Index finished off 6.49 points, or 0.48 percent, at 1,355.81. The Nasdaq Composite Index declined 9.06 points, or 0.38 percent, at 2,349.00.

Shares of Ambac declined 17.01 percent to $10.73 on the New York Stock Exchange. Shares of MBIA fell 12.6 percent to $13.96.

Adding to worries about the bond insurance sector was a move by Fitch Ratings to take away the top "AAA" rating for FGIC Corp's bond insurance arm on Wednesday. The downgrade is a blow to the insurer's business model and could also cause downgrades to more than 100,000 municipal bonds.

"When they see that stuff everybody hits the sell button at once... that's why the reaction is so severe," said Cummins Catherwood, managing director at Rutherford, Brown & Catherwood in Philadelphia.