NYTimes.com
Downgrade of 3 Banks Revives Credit Fears
Tuesday June 3, 2008 11:35 pm ET
By MICHAEL M. GRYNBAUM

Stocks markets dropped on Monday after three of Wall Street’s biggest banks were hit with a harsh ratings downgrade, sending the Dow Jones industrials down 134 points and leaving some investors worried about additional losses.

Shares of Lehman Brothers, Merrill Lynch and Morgan Stanley — marquee names in the investment banking world — sank after a major ratings agency, Standard & Poor’s, said it had lost some confidence in the banks’ ability to meet financial obligations.

Lehman shares fell 8.1 percent, Merrill dropped 3 percent, and Morgan Stanley declined 2.6 percent. Other banks, along with lenders and financial services firms, watched their stocks fall in tandem, dragging the Standard & Poor’s 500-stock index down about 1 percent for the day.

The discouraging news twinned with a shake-up at another bank, Wachovia, which ousted its chief executive, G. Kennedy Thompson, after a string of losses on mortgage-related assets. Wachovia’s stock dipped 1.7 percent, to $23.40.

Some analysts, though, said that they had been hearing about credit woes at investment banks for months.

“There are a number of investors out there who say, ‘Look, what did we just learn that we didn’t know before?’ ” said Brian Gendreau, a strategist at ING Investment Management in New York. “The fact that the market only went down 134 points suggests to me that a lot of the bad news was already anticipated.”

Russ Koesterich, who heads investment strategy at Barclays Global Investors in San Francisco, put it bluntly: “The reality was, there was no new news” on Monday.

But, he acknowledged, the developments revived fears that the tight credit market, which has led to the virtual collapse of billions of dollars of assets, would continue to bedevil banks.

The S.& P. report cited a fragile outlook for financial markets as a cause for the ratings downgrade.

“Write-downs will likely continue to depress earnings,” the report said. S.& P. also said that banks had not sufficiently calculated the risk of some of their investments and that it expected banking revenues to decline.

In addition, the ratings agency imposed negative outlooks onto two other investment firms, Bank of America and JPMorgan Chase. Shares of JPMorgan dropped 2 percent, and Bank of America declined 1.3 percent.

The S.& P. 500 index closed at 1,385.67, down 14.7 points. The Dow settled at 12,503.82, down 1.1 percent, and the Nasdaq composite index fell 1.2 percent, to 2,491.53.

Crude oil prices rose to $127.76, up 41 cents, while the euro fell against the dollar. The benchmark 10-year Treasury note rose 26/32, to 99 10/32. Its yield, which moves in the opposite direction, fell to 3.96 percent, from 4.06 percent.

Following are the results of Monday’s Treasury auction of three- and six-month bills:



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