Bank stocks sink on credit turmoil

Despite more details about plan to bailout banks, most financials plunge; Goldman and Morgan up on Fed news and Mitsubishi UFJ investment in Morgan.

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By Aaron Smith, CNNMoney.com staff writer

What should Congress do with the $700 billion proposal to take pressure off the credit markets?
  • Pass the legislation quickly
  • Pass it, but add stimulus and foreclosure relief
  • Reject it

NEW YORK (CNNMoney.com) -- Bank stocks took a dive Monday as investors continued to worry about the turmoil in the credit markets even as Congress works on passing a $700 billion bailout of the banking industry.

The S&P Banking Index plunged more than 11%, led by double-digit percentage declines in Washington Mutual (WM, Fortune 500), Wachovia (WB, Fortune 500) and Wells Fargo (WFC, Fortune 500).

"Credit markets are totally disrupted right now," said Brad Hintz, banking analyst for Sanford C. Bernstein. "We haven't seen a disruption like this in my career, and I've been on Wall Street since 1985."

The sell-off comes after an explosive rally in financial stocks Friday on the news of the bailout. The big gains led at least one analyst to downgrade several top banks, citing concerns about the dramatic run-up in stock prices.

On Monday morning, R. Scott Siefers, managing director of Sandler O'Neill & Partners, downgraded Wells Fargo, JPMorgan Chase (JPM, Fortune 500) and Merrill Lynch (MER, Fortune 500), believing them to be overpriced after last week's rallies.

Siefers said in a note that even though Wells Fargo is "one of the best companies around... the valuation reflects that and then some." Shares of Wells Fargo gained more than 16% last week.

Matt McCormick, analyst for Bahl & Gaynor Investment Council added that the investor "euphoria" surrounding the bailout proposal on Friday faded by Monday because Congress was still haggling over the details of the plan.

"Like most things, the devil's in the details," said McCormick. "[Investors] thought there was going to be some type of resolution over the weekend and it didn't happen. No one knows when this plan is going to be implemented. There are a lot of unknowns."

Reprieve for the investment banks

But shares of Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500), the last two stand-alone investment banks, fared a little better than the stocks of commercial banks Monday after the Federal Reserve announced late Sunday that it agreed to convert the two firms into bank holding companies in a bid to calm nervous investors.

The move will allow the banks to borrow from the Federal Reserve on a permanent basis but it also subjects them to tougher regulation.

Goldman's stock briefly traded higher Monday morning but finished the day with a 7% loss.

Shares of Morgan Stanley finished flat after earlier climbing as much as 10%. Morgan Stanley, however, was lifted by more than the Fed news.

Japanese bank Mitsubishi UFJ agreed to buy up to a fifth of the company Monday morning. The companies didn't name a price for the deal. But at Morgan Stanley's current market value, a 20% stake of the company would be worth about $6 billion.

"The speculation about their near-death experience is going to go away pretty soon now," said Hintz, referring to Morgan's deal with Mitsubishi. To top of page

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