2nd UPDATE: Financials Sold Off As Short-Selling Ban Lifted
10/09 02:44 PM
(Updates throughout with more short-selling information, Lehman Brothers settlement and recent stock prices.)
DOW JONES NEWSWIRES
Financial services companies slumped Thursday, leading stocks lower, as the Securities and Exchange Commission's ban on short-selling expired at midnight and as fears over the health of the credit markets continued to weigh on the financial sector.
Among the biggest decliners were XL Capital Ltd., which dropped 53% to $ 4.09; student lender SLM Corp., which sank 13% to $6.84; and Wachovia Corp., down 19% to $4.10. Insurer American International Group Inc. tumbled 19% to $2.57.
Prudential Financial Inc. dropped 20% to $34.66. The company's credit default swaps, an indicator of sentiment about the company's credit, widened by 50 basis points from Wednesday to 785 basis points, according to CMA DataVision, suggesting heightened concern. Still, the spreads have not reached distressed levels seen last week.
The Financial Select Sector SPDR Fund (XLF), an exchange traded fund of financial stocks, dropped 2.5% to $14.90.
The SEC's ban on short-selling had sought to protect as many as 950 stocks, most from the financial sector, from steep declines. Stocks have fallen sharply anyway, as worldwide equities markets saw a mass exodus of capital.
Some say that with the ban now lifted, many financial stocks are returning to valuations that reflect the general sentiment in the market.
But it has become difficult to borrow stocks in order to short them, said Steve Sachs, head of trading at Rydex Investments.
"From what we've heard talking to a lot of trading desks, we haven't heard of about a lot of new shorts....the loan market is pretty tight right now," Sachs said, pointing to some holders of long positions deciding not to lend stocks.
Last month, California Public Employees' Retirement System, or Calpers, said it temporarily halted lending out shares of four investment banks: Goldman Sachs Group Inc., (GS), Morgan Stanley, State Street Corp. (SST) and Wachovia to "help mitigate the current instability of the market and any potential adverse short-selling impact on these important financial institution." Other large institutions have also followed suit since.
Despite some difficulty borrowing stocks to short, Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners LP, said the lifting of the short-selling ban might have indirectly affected bank stocks Thursday. While the ban was in place, investors stayed away from certain option trades that they feared could be interpreted by regulators as indirect short-selling. But with the ban gone, option trading shot up Thursday, resulting in the substantial decline of bank stocks.
Besides short sellers, there are other catalysts damping sentiment for the financial sector.
Comments from Treasury Secretary Henry Paulson suggesting that more banks could fail seemed to undercut any relief found in the coordinated move by the world's central banks to cut short-term lending rates in unison.
Furthermore, with the Treasury hinting at injecting more capital into the market, there is a fear of diluting value for existing shareholders, said Craig Peckham, equity trading strategist at Jefferies & Co.
The expected Friday settlement for buyers of about $400 billion of protection on Lehman Brothers debt worried some stock traders. They said uncertainty over the settlement - which could be one of the most expensive in the history of the credit default swap market - is casting a dark cloud over the potential holders of the debt, such as Morgan Stanley, down 13% to 14.64, and Goldman Sachs, down 5.9% to $106.38.
Among regional banks, the only one strongly in the black Thursday was National City Corp.. Thursday, The Wall Street Journal said the regional bank is in talks with a number of banks about a possible sale. The bank's stock rallied on the news, gaining 2.7% to $2.29.
Investors rapidly sold off their shares in other regional banks amid increasing worries. KeyCorp was recently down 21%, while Marshall & Ilsley Corp. fell 16%. Fifth Third Bancorp, Zions Bancorp and Regions Financial Corp. were also down.
-By Kejal Vyas, Dow Jones Newswires; 201-938-5460, kejal.vyas@dowjones.com
-By Donna Kardos, Dow Jones Newswires; 201-938-5963; donna.kardos@dowjones.com
(Geoffrey Rogow, Matthias Rieker and Rob Curran contributed to this report.)
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(END) Dow Jones Newswires
10-09-081444ET
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