Financials bleed some more as capital worries intensify

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From Times staff writer Walter Hamilton:

For financial stocks, the third quarter is starting out in much the same way the second quarter ended -- with share prices in the sector sinking on worries about a lack of capital.

Today’s descent was led by mortgage giants Fannie Mae and Freddie Mac, which tumbled after a Lehman Bros. analyst predicted the pair might have to raise a combined $75 billion to comply with a potential accounting change.

Shares of Freddie Mac plunged 17%, while Fannie Mae sank 15%. The KBW bank stock index, meanwhile, slid 3.8%. Citigroup Inc. and Merrill Lynch & Co. fell to fresh multiyear lows.

If the accounting change -- which relates to the handling of home loans that are turned into mortgage-backed bonds -- takes effect, Fannie and Freddie “would both swing from having a large surplus capital cushion to having an even larger capital deficit,” Lehman analyst Bruce Harting wrote in a report to clients.

Fannie Mae may need to boost capital by $46 billion and Freddie Mac by $29 billion, Harting predicted. Those would be huge sums any time, but are especially eye-popping given that financial institutions worldwide already have been forced to raise $320 billion in the last year, according to Bloomberg data.

Much of that capital has come from big investors whose positions are now underwater because of the financial sector’s continued slide and who are getting skittish about throwing in more money.

So for Fannie and Freddie, raising $75 billion “would be extremely challenging, to say the least,” Harting wrote. He warned that the proposed accounting change “could possibly topple the already fragile capital markets.”

Investors already had been bracing for Merrill and other investment banks to uncork another spate of big write-offs this month, and the report on Fannie and Freddie only fed those fears.

In another blow to financial stocks, Standard & Poor’s reported today that dividend cuts in the sector totaled $13 billion in the second quarter, compared with payout hikes of only $3 billion.

In corporate America overall, 97 companies slashed dividends from April through June –- the most since 1990, according to S&P. That’s up from 18 dividend cuts in the second quarter of 2007.

At some point, the financial sector will stabilize and even turn around. But investors who have thus far bet on such a rebound have only hopped aboard an elevator heading down.