By Michael Patterson
Nov. 7 (Bloomberg) -- U.S. stocks fell, erasing their gains since the Federal Reserve's Sept. 18 interest-rate cut, after New York expanded its probe of the mortgage industry, General Motors Corp. posted a record loss and the dollar tumbled.
Washington Mutual Inc., the largest U.S. savings and loan, declined the most in 20 years after New York Attorney General Andrew Cuomo said there's a ``pattern of collusion'' in the bank's home-loan appraisals. Fannie Mae posted its steepest drop since 2005 and Freddie Mac sank to a seven-year low after Cuomo subpoenaed the two biggest U.S. providers of mortgage financing. GM slid after writing down $39 billion in tax benefits.
The Standard & Poor's 500 Index lost 44.65, or 2.9 percent, to 1,475.62, its biggest drop since Aug. 9 and lowest level since Sept. 12. The Dow Jones Industrial Average retreated 360.92, or 2.6 percent, to 13,300.02. The Nasdaq Composite Index decreased 76.42, or 2.7 percent, to 2,748.76, the largest decline since Feb. 27. More than 12 stocks fell for every one that gained on the New York Stock Exchange.
``Is there another shoe to drop in financial services? Does the dollar continue its dive? Those are the issues that the market is responding to,'' said Matthew Kaufler, who helps manage $2.6 billion at Clover Capital Management in Rochester, New York.
The collapse of the subprime mortgage market has dragged financial shares down 18 percent this year, prompted the Fed to cut interest rates and accelerated a sell-off in the U.S. currency. The dollar fell to the lowest in 30 years against a basket of six rivals today after Chinese officials said they plan to move some of the nation's $1.43 trillion of foreign-exchange reserves into stronger currencies.
Cuomo Probe
All 10 industry groups in the S&P 500 fell at least 1 percent, led by the biggest drop in financials in five years.
``Today was just not a great morning to get out of bed if you're an equity trader,'' said Liam Dalton, chief executive of Axiom Capital Management, which manages $1.3 billion in New York.
Washington Mutual lost $4.19, or 17 percent, to $20.04, its lowest since June 2000. Cuomo said he uncovered a ``pattern of collusion'' in appraisals on Washington Mutual loans. The attorney general is demanding Fannie Mae and Freddie Mac hand over details of loans they buy that may show appraisal values on homes were illegally inflated. Cuomo said he is targeting banks beyond Washington Mutual.
``We take accusations such as these very seriously,'' David Schneider, president of Washington Mutual's home-loan division, said at a conference with investors.
Separately, Washington Mutual said home prices will continue to decline in 2008 and it must set aside more money for bad loans. New U.S. residential mortgages will probably total about $1.5 trillion in 2008, compared with industry forecasts of $2 trillion, the company said.
Fannie Mae tumbled $5.60, or 10 percent, to $49.79. Freddie Mac fell $4.26, or 8.6 percent, to $45.13. Fannie Mae and Freddie Mac said they will appoint an independent examiner to review the appraisal practices cited in the complaint.
GM Tumbles
GM declined $2.21, or 6.1 percent, to $33.95, its steepest loss in a year. Its third-quarter loss, excluding the tax writedown, was $2.80 a share, more than 12 times analysts' estimates. Mortgage-related losses at GM's partly owned finance unit overwhelmed auto sales that were the highest ever. The automaker signaled it won't generate enough earnings to use the tax benefits it wrote down, citing defaults on subprime mortgage loans at GMAC LLC and ``more challenging'' auto-market conditions in the U.S. and Germany.
Credit-Card Troubles
Capital One Financial Corp. declined $9.23, or 16 percent, to $50.21, the largest drop since October 2002. The biggest independent U.S. credit-card issuer said its cost for bad debts tied to mortgages and credit cards will be worse than predicted. Charge-offs may range from $4.9 billion to ``the mid $5 billions,'' Capital One said. The company had forecast writedowns of $4.9 billion.
American Express Co. and other U.S. credit-card issuers may be forced to revise their loss estimates after Capital One boosted its forecast, Morgan Stanley analyst Kenneth Posner said. American Express, the third-largest credit-card network, fell $3.20 to $55.37. Discover Financial Services, the credit-card company spun off by Morgan Stanley in June, lost 98 cents to $17.26, a record low.
The S&P 500 Financials Index dropped 5.1 percent, the biggest decline since July 2002. The gauge fell to its lowest level in two years as all 93 members retreated. Banks, brokerages, insurance companies and other financial firms have tumbled this year after their holdings of mortgage-related securities declined in value and investors speculated more losses lie ahead.
AIG, Citigroup
American International Group Inc. dropped $4.15, or 6.7 percent, to $57.90 for the biggest decline in the Dow average. The world's largest insurer was scheduled to report quarterly results after U.S. exchanges close. Analysts expect AIG to say third-quarter profit was $1.62 a share, according to the average estimate in a Bloomberg survey.
Citigroup Inc. declined $1.67 to $33.41, the lowest since March 2003. The biggest U.S. bank by assets and HSBC Holdings Plc received warnings of possible downgrades to their structured investment vehicles as Moody's Investors Service reviewed its ratings on $33 billion of debt. Citigroup said this week it provided $7.6 billion of financing to the SIVs it runs after they were unable to repay maturing debt. The stock has dropped 40 percent this year.
Level 3 Assets
U.S. banks and brokers face as much as $100 billion of writedowns because of Level 3 accounting rules, in addition to the losses caused by the subprime credit slump, according to Royal Bank of Scotland Group Plc. The Financial Accounting Standards Board's rule will make it harder for companies to avoid putting market prices on securities considered hardest to value, known as Level 3 assets, Royal Bank's Bob Janjuah wrote.
Goldman Sachs Group Inc., the biggest U.S. securities firm by market value, dropped $8.98 to $214.18. Morgan Stanley, the second largest, declined $3.32 to $51.19.
``You see the worries about subprime in all of the banks and major brokerages,'' said Joseph Veranth, who helps manage $2.8 billion as chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin. ``We still think there's going to be a couple more legs downward.''
The dollar fell to a record versus the euro and the lowest since 1981 against the pound. The New York Board of Trade's dollar index dropped to 75.077, the lowest since the gauge started in March 1973.
The dollar is ``losing its status as the world currency,'' Xu Jian, a vice director at China's central bank, told a conference in Beijing. ``We will favor stronger currencies over weaker ones, and will readjust accordingly,'' Cheng Siwei, vice chairman of China's National People's Congress, said at the same meeting.
`Scares Off Capital'
``The big issue on any currency is if its rate of depreciation is so fast that it scares off capital, and the announcement that we heard from China feeds those fears,'' said Larry Smith, who oversees about $400 million as chief investment officer at Third Wave Global Investors in Greenwich, Connecticut.
Federal Reserve Bank of St. Louis President William Poole said the housing industry's woes may not end soon and policy makers might need to consider ``additional rate cuts'' should the problems spread. Poole, a voting member on the Fed's rate-setting Federal Open Market Committee this year, spoke today in Milwaukee.
Traders increased wagers that the Fed will lower its benchmark interest rate to 4.25 percent by the end of the year. The odds of a quarter-percentage point rate cut at the central bank's Dec. 11 policy meeting are 70 percent, up from 62 percent yesterday, futures contracts show.
The Chicago Board Options Exchange Volatility Index increased 24 percent to 26.49, the highest since Sept. 10. Higher readings in the so-called VIX, derived from prices paid for S&P 500 options, indicate traders expect bigger share-price swings in the next 30 days.
``The collective weight of all this data is moving markets around very violently,'' said Dan Veru, who helps manage about $3 billion at Palisade Capital Management in Fort Lee, New Jersey. ``We've certainly entered a period of sustained higher levels of volatility.''
The Russell 2000 Index, a benchmark for companies with a median market value of $618 million, dropped 3.2 percent to 775.96. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 2.8 percent to 14,926.22. Based on its decline, the value of stocks decreased by $535.7 billion.
American Express Co. (AXP US)
American International Group Inc. (AIG US)
Capital One Financial Corp. (COF US)
Citigroup Inc. (C US)
Discover Financial Services (DFS US)
Fannie Mae (FNM US)
Freddie Mac (FRE US)
General Motors Corp. (GM US)
Goldman Sachs Group Inc. (GS US)
Morgan Stanley (MS US)
Washington Mutual Inc. (WM US)
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