Transcripts

Credit Concerns Ruin The Interest Rate Reduction

SUSIE GHARIB: A huge sell off on Wall Street today, as investors dumped shares of financial stocks. The Dow tumbled 362 points and the NASDAQ fell 64. Triggering today's selling, an analyst downgrade of Citigroup, which caused its shares to plunge nearly 7 percent. A big concern among investors: can we expect more bad news from the financial sector as a result of the sub-prime mortgage crisis? Suzanne Pratt reports.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Most experts would agree Citigroup is facing serious challenges. Not only could there be additional write downs in the fourth quarter from bad sub-prime loans, but now some analysts are questioning the firm's financial fortitude. Since yesterday, three Wall Street firms have downgraded Citi on concerns about insufficient capital reserves, with one analyst suggesting Citi may need to cut its dividend. Still, it's unclear whether Citi's problems are limited to the nation's largest bank or likely to ripple throughout the financial sector. The Henssler Financial Group's Ted Parrish says he's been underweight financials because he's worried about the impact of the credit crisis on their bottom lines.

THEODORE PARRISH, DIR. OF INVESTMENTS, THE HENSSLER FINANCIAL GROUP: Now that we're seeing some of those write offs, we think it's justified and we don't think the worst is over in terms of the write offs. Whether the worst is over for the stock price performance is another question though.

PRATT: Adding to concerns today was word that Credit Suisse is taking a $2 billion write down to third quarter profits because of the credit market crisis. And earlier this week, Merrill Lynch chief Stan O'Neal stepped down in the aftermath of the firm's huge quarterly loss. Morningstar analyst Ganeesh Rathnam says investors are overreacting.

GANESH RATHNAM, BANKING ANALYST, MORNINGSTAR: I think the market is discounting a lot of bad news into financial stocks, a lot more than is deserved, a lot more than history suggests that the market should. And, I think it's overdone.

PRATT: It makes sense that investors are focused on financials when you consider the sector comprises a fifth of the S&P 500. Third quarter profits for big banks and investment firms were a big disappointment to Wall Street, and concerns are deepening about the fourth quarter. Right now analysts expect to see only a 1 percent jump in year-over-year earnings growth for the sector in the fourth quarter. That compares to expectations of 7 percent just a month ago. Thomson Financial's Mike Thompson believes additional cuts to profit forecasts are coming.

MICHAEL THOMPSON, DIR. OF RESEARCH, THOMSON FINANCIAL: There seems to be a movement afoot that would lead us to believe that you're going to see continued revisions down in the financials as nerves start getting wound up regarding adjustable rate mortgage resets and the damage that might do.

PRATT: Some investment banks will begin reporting their fourth quarter results in mid-December as their fiscal years end later this month. Experts say those numbers could be the first indication as to whether problems in the financial sector are deepening. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.