By Michael Patterson


March 6 (Bloomberg) -- U.S. stocks fell to an 18-month low, led by banks, after home foreclosures climbed to a record and loan defaults by Thornburg Mortgage Inc. and a Carlyle Group bond fund spurred concern that credit losses are deepening.

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. led financial shares to the lowest level since May 2003. Retailers J.C. Penney Co. and Gap Inc. fell on sales that trailed estimates. The Standard & Poor's 500 Index lost 10 points in the final half hour of trading as investors speculated tomorrow's U.S. employment report will show the economy has tipped closer to recession.

The S&P 500 tumbled 29.36 points, or 2.2 percent, to 1,304.34, the lowest closing level since September 2006. The Dow Jones Industrial Average lost 214.6, or 1.8 percent, to 12,040.39. The Nasdaq Composite Index decreased 52.31, or 2.3 percent, to 2,220.5. More than 11 stocks fell for every one that rose on the New York Stock Exchange.

``It's a tough environment,'' Paul Rasplicka, who manages $4 billion at AIM Investments, said in a Bloomberg Television interview in New York. ``Lending terms are tighter. The willingness to extend credit is less. It's making it very tough for business.''

Financial stocks dropped for a sixth day, the longest losing streak since November, after an industry report showed foreclosures surged at the end of 2007 and late payments rose to the highest in 23 years. The S&P 500 slid below its lowest close of the year on Jan. 22, the day Federal Reserve policy makers slashed interest rates by the most in 23 years in response to tumbling global stocks and concern the economy was contracting.

Banks Decline

Citigroup, the biggest U.S. bank by assets, fell 98 cents to $21.17, its lowest close since November 1998. Bank of America, the second-largest, decreased $1.03 to $36.52. JPMorgan, the No. 3, lost $1.37 to $37.37.

Yield spreads on some mortgage-backed securities climbed to 22-year highs today, signaling home loans will be more expensive for borrowers. The collapse in subprime mortgages has caused at least $181 billion of writedowns and credit losses worldwide, prompting banks to restrain lending.

J.C. Penney, the third-largest U.S. department-store chain, tumbled $5.34 to $42.77. Same-store sales last month dropped 6.7 percent, worse than the average estimate for a decline of 2.4 percent, according to Retail Metrics LLC.

Gap, the largest U.S. clothing retailer, lost $1.15 to $19.37. Sales fell 6 percent, almost twice the average estimate for a 3.1 percent decrease.

Luxury Department Stores

Nordstrom Inc., a luxury department-store chain, dropped $2.34 to $35 after posting sales that trailed estimates.

The S&P 500 Retailing Index declined 4 percent to the lowest since Jan. 17 as 30 of 31 members fell. The first drop in employment in more than four years in January and higher gasoline prices are causing Americans curtail spending. Gas prices climbed today and crude oil rose to a record $105.97 a barrel as the U.S. dollar fell to its lowest ever against the euro.

The S&P 500 Consumer Discretionary Index extended its decline to 2.6 percent after Fed data showed U.S. household wealth fell in the fourth quarter for the first time in five years and borrowing slowed as home values plunged and lenders restricted credit.

The Labor Department may report tomorrow that the U.S. added 23,000 jobs in February after losing 17,000 the previous month, according to the median estimate of economists surveyed by Bloomberg News.

`More Bad News'

``People are expecting more bad news,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. ``You're going to have a spillover effect into unemployment. It goes from one sector to another.''

All 10 industry groups in the S&P 500 dropped, with 483 members posting declines. Financial shares were the biggest drag on the index, falling 3.7 percent as a group.

Merrill Lynch declined $3.46 to $45.86, the lowest since June 2003. The securities firm said it would sweeten the terms on $2.2 billion of convertible bonds that investors can redeem next week, giving them the prospect of a bigger ultimate payout.

Separately, Merrill and four of its Wall Street rivals had their first-quarter profit estimates cut by Keefe, Bruyette & Woods Inc. analyst Lauren Smith for the second time in less than a month. More than a dozen analysts have lowered first-quarter profit estimates for the biggest U.S. securities firms in the last two weeks on expectations of more debt-related writedowns.

18-Month Low

Goldman Sachs Group Inc. lost $6.32 to $158.65, an 18-month low. Bear Stearns Cos. retreated $5.88, or 7.8 percent, to $69.90 for the steepest decline since October 2000. Lehman Brothers Holdings Inc. fell $2.03 to $46.03. Morgan Stanley dropped $1.80 to $39.67, the lowest since October 2004.

Thornburg Mortgage lost $1.75, or 51 percent, to $1.65. JPMorgan sent a default notice after Thornburg failed to meet a $28 million margin call, Thornburg said. That triggered defaults on other financing agreements and the amounts involved are ``material.'' RBC Capital Markets wrote in a research note today that ``bankruptcy is now a more likely outcome'' for Thornburg. Shares of Thornburg, a ``jumbo'' home mortgage specialist, had changed hands for more than $12 last week.

Fannie Mae, the largest source of money for U.S. home loans, declined $2.57 to $21.70, the lowest since April 1995. Freddie Mac, the second-biggest, lost $1.50 to $20.14.

Washington Mutual Inc. dropped $1.04 to $11.76, the lowest since May 1996. Standard & Poor's lowered its credit rating on the largest U.S. savings and loan and said another cut is possible.

Missed Margin Calls

Carlyle Capital Corp., Carlyle Group's publicly traded mortgage bond fund, said it missed four of seven margin calls yesterday totaling more than $37 million. The fund, which raised $300 million in July and used loans to buy about $22 billion of AAA-rated mortgage securities issued by Fannie Mae and Freddie Mac, expects to get at least one more notice of default related to the margin calls.

Carlyle Group, started by David Rubenstein in 1987, is the world's second-biggest private-equity firm.

UBS AG's U.S.-traded shares dropped $1.31 to $29.52, the lowest since October 2003. Europe's biggest bank by assets ``likely'' sold its 25 billion francs ($24 billion) prime Alt-A mortgage portfolio in a ``fire sale,'' JPMorgan said as it lifted its ``credit-crisis'' writedown estimate for the bank to 18.5 billion francs.

`Painful Exercise'

``Leverage is coming off across the system,'' said David Baker, the Boston-based chief investment officer at North American Management, which oversees $1.1 billion. ``It's going to be a painful exercise and I don't think the equity market has full appreciation of what it's going to mean and how it's going to be unwound.''

New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier, the Mortgage Bankers Association said. The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985.

The difference in yields, or spread, on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened about 11 basis points, to 227 basis points, the highest since 1986 and 93 basis points higher than Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less. A basis point is 0.01 percentage point.

More Capital Needed?

Ambac Financial Group Inc., the bond insurer that announced plans yesterday to raise $1.5 billion by selling common shares and equity units to salvage its AAA credit rating, dropped $1.28 to $7.42. JPMorgan analysts said the shares may fall in the ``near term'' and the company may need more capital to avoid a downgrade.

Wal-Mart Stores Inc. gained 43 cents, or 0.9 percent, to $49.98 for the only gain in the Dow average. The world's largest retailer said February sales increased 2.6 percent, exceeding its forecast, after price cuts spurred demand for groceries and medicines.

Fed Bank of New York President Timothy Geithner said the central bank may need to keep interest rates low for a while if financial markets remain under stress and threaten economic growth.

Traders priced in an 98 percent chance that the Fed will lower its benchmark lending rate by 0.75 percentage point to 2.25 percent by its March 18 policy meeting, up from 54 percent odds yesterday, according to Fed funds futures prices compiled by Bloomberg. The rest of the bets are for a 0.5 point reduction.

Treasuries rose and three-month bill rates fell to the lowest level since 2004 as investors took refuge in government securities.

``You don't know when the next shoe is going to drop and where the next writedown is going to come from,'' said John Buckingham, who helps oversee about $700 million as president of Al Frank Asset Management in Laguna Beach, California. ``The news in the short run is likely to continue to be ugly. You have to have a strong stomach.''