Citigroup, other financials off in recession worry
NEW YORK (Reuters) - Shares of Citigroup Inc and other financial companies suffered broad declines for a second day on Tuesday, as evidence mounted that borrowers are falling behind on more payments, the U.S. economy might be in recession, and losses on complex debt securities might worsen.
Citigroup, a Dow Jones industrial average component, closed $2.17, or 7.4 percent, lower at $27.05, while JPMorgan Chase & Co fell 5 percent and Bank of America Corp dropped 3.8 percent. Goldman Sachs Group Inc slid 5.4 percent after a downgrade by Oppenheimer & Co analyst Meredith Whitney.
The Standard & Poor's Financial Index fell 4.6 percent, with all but one of its 93 components declining. Broad U.S. market indexes fell about 3 percent each.
"There is speculation that the credit crunch will get worse before it gets better," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York. "The subprime loan crisis in the United States will continue to hurt financial stocks, particularly the banks, and therefore Citigroup is once again under selling pressure."
The Institute for Supply Management said the service sector, which accounts for about two-thirds of the economy, unexpectedly fell to 41.9 in January from 54.4 in December, its largest decline ever. A reading below 50 indicates contraction. The report reinforced some investors' belief that the first recession since 2001 has arrived.
"It's basically a case of a buyer's strike," said Todd Clark, director of stock trading at Nollenberger Capital Partners in San Francisco, referring to financial companies. "Anyone who doubted the economy was slowing substantially or is in recession is no longer doubting it."
Separately, Fitch Ratings said it may lower its ratings for collateralized debt obligations as much as five notches.
Downgrades could reduce the value of CDOs, resulting in losses on top of the more than $100 billion of write-downs at such companies as Citigroup and Merrill Lynch & Co.
Fitch also said it may lower its "triple-A" ratings for MBIA Inc, the world's largest bond insurer. Warren Buffett, whose Berkshire Hathaway Inc started its own bond insurer in December, said "we will not be investing" in rival bond insurers, Fox Business Network said.
The market also digested a $724 million fourth-quarter loss at GMAC, the finance company owned largely by Cerberus Capital Management LP and General Motors Corp. Much of the loss came from GMAC's Residential Capital mortgage unit.
PROBLEMS NOT GOING AWAY
Finance companies came under pressure on Monday as brokerage downgrades of American Express Co, Wachovia Corp, Wells Fargo & Co and other companies renewed fears of rising losses from borrower defaults and residential real estate.
The S&P Financial Index had gained 16.1 percent over the prior two weeks, helped by the U.S. Federal Reserve decision to cut a key lending rate, the federal funds rate, twice in nine days to 3 percent from 4.25 percent.
An economic recession could speed up the already rising pace of defaults by borrowers, hurting companies with large consumer and business loan books. Many large banks predicted slow economic growth for 2008, especially in the year's first half, but most were not counting on an actual recession.
"The number signifies the worst fears that were out there that this is going to be a broader and deeper slowdown than thought," said Matthew Kaufler, a fund manager at Clover Capital Management. "There is also a growing realization that the credit problems aren't going away."
(Additional reporting by Jennifer Coogan, Pedro Nicolaci da Costa, Chelsea Emery, Doris Frankel, Justin Grant, Richard Leong and Nick Zieminski; Editing by Gerald E. McCormick and Braden Reddall)
