US stocks tumbled on Monday as concerns about the credit crisis and financial companies outweighed earlier optimism over the government's proposed rescue plan for mortgage finance companies Fannie Mae and Freddie Mac. On Sunday, the US Treasury and Federal Reserve said they would lend money and buy equity if needed to rescue the two pillars of the US housing market, sending shares soaring early on Monday.
But the gains soon fizzled as analysts and investors noted any direct government investment in Fannie Mae and Freddie Mac would further dilute existing shares, the last thing investors want, especially given the spectacular drops in the shares over the past year.
More caution hung over the market due to concerns about regional banks after the failure late last week of mortgage lender IndyMac Bancorp. Shares of regional banks were among the top drags. Trade was briefly halted for shares of National City at midday. After announcing the company was not experiencing unusual activity, trading resumed, but shares plunged over 26 percent and S&P Equity Research cut the Cleveland-based regional bank to sell from hold.
Goldman Sachs' Richard Ramsden said he sees the greatest risk of dividend cuts at several regional banks, including Zions Bancorp, Regions Financial and Suntrust Banks. Goldman also cut Regions Financial price target to $10 from $22, and according to theflyonthewall.com, cut Zions Bancorp to sell from neutral.
Merrill Lynch warned Fannie and Freddie will continue to incur rising losses from mortgage defaults for several years and may need to raise additional capital. Merrill, along with Citigroup, cut price targets on the shares.
"Bottom line is the market is in no mood to give anyone any benefit of the doubt right now," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. Kenny pointed to the long-term impact of Fannie Mae and Freddie Mac's poor performance as the key drivers in investor uncertainty. "I mean it's nice to know that the government is willing to take unorthodox steps to calm the markets and to infuse confidence in the part of the investors, but this is a long road ahead of us here," he said.
The Dow Jones industrial average fell 69.28 points, or 0.62 percent, to 11,031.26, while the Standard & Poor's 500 Index dropped 12.57 points, or 1.01 percent, to 1,226.92. The Nasdaq Composite Index shed 29.94 points, or 1.34 percent, to 2,209.14. Shares of Fannie Mae, fell 4.9 percent to $9.75 on the New York Stock Exchange, while those of Freddie Mac tumbled 10.7 percent to $6.92. Both stocks had risen more than 20 percent in trade before the opening bell.
Among regional banks, Fifth Third Bancorp slid 5.8 percent to $11.76 on the Nasdaq, while shares of National City tumbled 21.5 percent to $3.46. Zions Bancorp shares fell 21 to $20.30, Regions Financial dropped 14.1 percent to $7.34 and Suntrust Banks lost 7.24 percent to $28.70.
In other news, activist shareholder Carl Icahn blasted Yahoo Inc on Monday for rejecting his joint proposal with Microsoft Corp, saying management was more focused on who would run the Internet company than on the details of the offer. Shares of Yahoo fell 4.7 percent to $22.45 and Microsoft shares dipped 0.44 percent to $25.15.