Dive in financial stocks accelerates as investors give up

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‘It can’t get much worse,’ you figure if you still own a bank or brokerage stock.

To which the market responds: Try me.

Financial shares were bludgeoned again today, driving many to new multiyear lows and leading Wall Street’s retreat.

It’s hard to overstate how drastically investors’ views of these stocks have changed over the last two weeks. Consider: Sellers of Newport Beach-based mortgage lender Downey Financial were willing to take as little as $4.47 a share to get out of the stock today. Two weeks ago the price was 76% higher, at $7.85.

Bank of America, which was trading at $33.87 two weeks ago, has fallen nearly 15% since, to $28.85.

This selling wave is an acceleration of a downturn that began for many financial issues early in May, following a bounce in the stocks in late March and in April.

What has changed in the last few weeks? Rumors about financial trouble at Lehman Bros. cropped up as June began, and there was more than a kernel of truth in them: Lehman on Monday said it would report a $2.8 billion loss in its latest fiscal quarter -- far exceeding analysts’ worse fears -- because of another round of write-downs on commercial-property mortgages and other investments.

The bigger industry issue this week has been deepening fear that the Federal Reserve, with its sudden focus on inflation risks, might begin to raise interest rates this fall.

One of the Fed’s main goals in slashing its benchmark short-term interest rate to the current 2% was to make sure loss-ridden financial firms could borrow cheaply as they try to repair their eroded balance sheets. If the Fed tightens credit, that repair job becomes a lot tougher, which means many financial companies will take longer to get back to health -- if they can get there at all.

And in the meantime, as Lehman showed, the bleeding from loans and investments gone bad hasn’t stopped.

In its report today on regional economic trends, the Fed included a specific warning about banking troubles in its Western region, including California. Since mid-April, the report said, credit quality at Western banks has ‘eroded a bit further, mainly for loans related to the housing sector, with the most significant adverse impacts on asset portfolios noted for smaller community banks.’

That may help explain heavy selling this week in shares of small- and mid-size California lenders such as EastWest Bancorp, Cathay General Bancorp and FirstFed Financial.