"Whack-ovia" Helps Drives Fear Of Financials

Fear of financials is back in a big way today. Its rattling stocks and driving buyers into bonds.

The latest shoe to drop came this afternoon when Standard & Poor's said it was lowering the ratings of Merrill Lynch ,Lehman and Morgan Stanley . Traders, though, say the move was not really a surprise and is trailing the market's view.

S&P managing director Scott Sprinzen was on "Street Signs." "We decided the pressures on the broker dealers were such that the downgrades of Merrill, Morgan Stanley and Lehman were in order," said Sprinzen.

"We do think that writedowns will be one source of continuing earnings pressure on the broker dealers to a varying extent, based on the amount of exposure they still have to problem assets," Sprinzen said. "But we're also concerned just about the base level of business activity, that is how it affects core earnings, even apart from the writedowns."

S&P made the following ratings changes:

Lehman to A form A+

Morgan Stanley to A+ from AA-

Merrill Lynch to A from A+

S&P also revised its outlooks on Bank of America and JP Morgan to negative and removed Citigroup from creditwatch negative. Wachovia was put on creditwatch negative.

Market Mayhem
The market traded off on the news, touching the lows of the day, but has since regained some ground. Traders say the debate is whether the group offers some bargains today, as stocks like Goldman Sachs are selling off along with rivals.

Today's jitteriness in the financials started early. Overnight, British mortgage lender Bradford and Bingley said it pared back a plan for a 300 million pound issue of discounted stock. It said it is now selling 179 million pounds of equity to Texas Pacific Group, giving TPG 23 percent of the eighth largest U.K. mortgage lender.

B&B said its net interest margins are declining and it's seeing increased late payments. It reported underlying profit of 56 million pounds, down from 108 million a year earlier. B&B said it is having particularly trouble with loans purchased from GMAC.

Then there was Wachovia, which surprised the streetwith news this morning that its board had asked ceo Ken Thompson to "retire."Wachovia stock dropped on concerns about the potential for more losses at the bank. But there was also a flurry of speculation that Wachovia would now be vulnerable to a takeover. Traders mention Wells Fargo and JP Morgan as the type of buyers that might be interested in Wachovia.

Wachovia had already taken the chairman title away from Thompson, a move sought by shareholders. Wachovia chairman Landy Smith will serve as interim ceo until a replacement is found. Thompson was ceo for the past eight years, and came under fire when Wachovia shaved its dividend and reported far bigger than expected losses. Wachovia's 2006 purchase of mortgage lender Golden West Financial has contributed to Wachovia's woes.

"I find it very interesting the commercial banks haven't pushed their ceos out even though they've had these problems," RBC Capital analyst Gerard Cassidy said on "Squawk Box" today. He noted the same has not been true at the investment banks and major banks, like Citigroup and Merrill Lynch.

Not long after Cassidy made that comment, Washington Mutual issued a release saying it was splitting the chairmanship away from its ceo Kerry Killinger. Washington Mutual also took steps to strengthen its corporate governance.

Staying Away
Wall Street has a mixed view of the financial sector, and Merrill is a firm that has been underweighting the stocks. Today, in a note, Merrill sector strategist Brian Belski said earnings deterioration is still a problem and credit spreads are still wide. He said these trends will have to reverse before he becomes constructive on the sector.

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