The financial sector took several more body blows on Tuesday as losses from the credit crisis continued to mount at some of the world's biggest banks.
The news, which sent financial stocks plunging, reminded investors that the financial crunch is still far from over and pushed the overall stock market lower.
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Credit Crunch
UBS led the parade of bad news by announcing a further $5 billion in writedowns on investments, taking its total bill from the markets crisis to $42 billion.
JP Morgan Chase, meanwhile, said it incurred losses of about $1.5 billion for the quarter to date, as it continued to be hurt by wider credit spreads, lower levels of liquidity, as well as the disruption in the credit and mortgage markets.
Goldman Sachs was downgraded by Deutsche Bank as well as Oppenheimer analyst Meredith Whitney, who cut the third-quarter share view to $2.15 from $3.54 and rated the stock "market perform."
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Wachoviaincreased its previously reported second-quarter loss to $9.11 billionto cover costs to settle a probe of auction-rate securities sales, and said it will cut more jobs as the housing market deteriorates.
Citigroup also warned that Bank of America may cut its dividend later this year or early in 2009.
With the precipitous decline in oil prices helping to lift stocks from their July low, unease about the financial sector undermined hopes that cheaper energy prices would revitalize consumer and business spending, thus brightening the profit outlook.
"The thing about this most recent rally is that it has pushed people to look forward," said Rick Meckler, president of investment firm LibertyView Capital Management. "Unfortunately we still have the current realty with us."
"You're going to continue to get write-offs from the financial sector," he added. "Investors will either look past that or periodically they are going to stare at that with shock and cause sell-offs."
Besides the writeoff, UBS will split off its investment banking unit that made it Europe's top casualty of the credit crunch—and scared off wealthy clients—a move that analysts said signals the sale of the beleaguered business.
The world's biggest banker to the rich gave in to shareholder pressure to restructure on Tuesday, admitting there were problems with its one-bank model as it reported fresh writedowns and clients withdrawals in the second quarter.
UBS joins U.S. peers Citigroup and Merrill Lynch in taking more big hits in the quarter from exposure to risky mortage assets.
They remain the three hardest hit banks and investors are still worried about yet more subprime costs.
JPMorgan said trading conditions have "substantially deteriorated" in the third quarter compared with that of the second, and spreads on mortgage-backed securities and loans have "sharply widened." The estimated losses exclude hedging, the firm said.
The writedowns were partly driven by Merrill Lynch's recent decision to sell $30.6 billion in risky debt to Lone Star funds for just $6.7 billion, or about 22 cents on the dollar, FT said.
Merrill's move ratcheted up pressure on rivals to cut the values of their own subprime assets as they grapple with mounting debts and weakening economies.
Wachovia, the fourth-largest U.S. bank is now reporting a loss of $4.31 per share, up from the $8.86 billion, or $4.20 a share, it reported on July 22, according to its quarterly report filed Monday with the U.S. Securities and Exchange Commission.
Chuck Burton
A Wachovia branch bank is shown in a Charlotte, N.C. file photo from July 20, 2006. After a rough year, the banking industry appears headed for another in 2007. (AP Photo/Chuck Burton, File)
Wachovia also now plans to cut 6,950 jobs, 600 more than it had disclosed, with the additional cuts coming from mortgage operations, spokeswoman Christy Phillips-Brown said.
The cuts affect about 5.8 percent of Wachovia's 120,000-person workforce.
Wachovia also is also eliminating 4,400 open positions.
Separately, Wachovia said the SEC may recommend civil charges against its main banking unit in connection with municipal derivatives transactions.
It also said various state attorneys general have issued subpoenas over that matter. The bank said it was cooperating with the probes. Bank of America reported receiving its own subpoenas last week.