BANKING GROUP Wachovia, the sixth-largest US lender by assets, lost more than a quarter of its value yesterday as confidence in its business declined following the failure of Washington Mutual (WaMu) and the collapse of a $700 billion deal to bail out the US financial sector.
Other US and European financials were also on the slide as political manoeuvring resumed in Washington in an effort to retrieve the bailout plan.
With interbank lending for terms of more than a day at a virtual standstill, western central banks made new co-ordinated interventions in the money markets to stimulate liquidity by boosting the supply of one-week dollar funds.
The moves by the European Central Bank, US Federal Reserve, Bank of England and Swiss National came on top of their interventions in the markets for overnight funds in an effort to unfreeze interbank lending.
On Wall Street, Wachovia lost as much as 28 per cent of its value and regional lender National City Corp fell 40 per cent following JP Morgan's purchase of Washington Mutual, which was seized by regulators after the withdrawal of more than $16 billion in deposits.
Wachovia and National City have several profitable businesses but investors are focused on their real estate exposure. As Wachovia works through a $122 billion portfolio of "option" adjustable-rate mortgages the bank is trying to cut costs and bolster capital.
"Washington Mutual showed that one of the big ones can go down and if you are looking at who else in the top 10 is facing the most pressure, Wachovia is right there," said Stan Smith, a banking professor at the University of Central Florida in Orlando .
"You're talking about the largest failure in banking history [at Washington Mutual] so there is going to be a negative reaction, right?" said William Smith, president of Smith Asset Management in New York. "What you're going to see is the strong stronger, and the weak are going to die off."
With some analysts pointing to the return of systemic risk as a result of WaMu's failure, institutions such as Ulster Bank owner Royal Bank of Scotland (RBS) and An Post's joint venture partner Fortis saw their shares come under pressure. RBS dropped 5.7 per cent.
Fortis lost 21 per cent as its chief, Herman Verwilst, said he was "flabbergasted" by recent declines in its value. The bank found itself denying it faced any liquidity crisis, but pledged to speed up asset disposals as it felt the brunt of growing investor unease about Europe's fragile financial sector.
By noon in New York the Dow Jones industrial average was down 0.7 per cent.
Research In Motion, which makes the Blackberry e-mail-phone device, lost 25 per cent after cutting its profit forecast. The company is facing competition from Apple's iPhone product.
(Additional reporting by Financial Times, Reuters, Bloomberg)
