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Confidence in banks falters despite federal actions

New York Times News Service

Even as the Bush administration moved to rescue the nation’s largest two mortgage companies, confidence in the banking sector spiraled downward Monday.

In southern California, lines snaked around branches of IndyMac Bancorp, the large lender seized by federal regulators on Friday, while customers hurried to withdraw their money.

Even as federal regulators issued assurances that depositors’ savings were safe, Wall Street analysts circulated lists of lenders that might be vulnerable. Shares of regional banks plunged in one of the sharpest declines since the 1980s.

Many investors fear that the government’s resolve to help Fannie Mae and Freddie Mac, the giant companies at the center of the nation’s mortgage market, will not hold back the rising tide of bad loans unleashed by the weakening housing market and faltering economy.

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Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corp., said the FDIC expects a small number of the nation’s banks to run into trouble over the next year. But she asserted that the worries driving down banking shares, fueled by rumors in the marketplace, do not presage widespread failures.

"People should not assume that just because the stock price has been going down, that we’re going to close their bank," Bair said. "In addition to our credit problems, I don’t want to have to start worrying about bank runs."

Investors fled banking stocks en masse. The Standard & Poor’s 500 Bank Index fell nearly 10 percent. Washington Mutual, the nation’s largest savings and loan, lost more than a third of its value, prompting the lender to issue a statement that it was "well capitalized." National City Corp. of Cleveland, which is the largest bank in Ohio, fell almost 15 percent. That bank also took the unusual step of issuing a statement that it was sound. Large lenders in Tennessee, Alabama and Florida also swooned.

Nervous investors sent all three major stock indexes down on Monday. The Dow Jones industrials closed down 0.41 percent, at 11,055.19. The Standard & Poor’s 500-stock index lost 0.9 percent, to close at 1,228.30, and Nasdaq fell 1.17 percent, to 2,212.87,

The worries about the financial industry when Bear Stearns imploded in March and spilled over to Fannie Mae and Freddie Mac last week are buffeting small and midsize banks, many of which are heavily exposed to weakening local property markets and loans to builders.

"The market wonders: Which institution is too small to bail out?" said William H. Gross, the chief investment officer of Pimco, the big money management company. Traders "seem to have picked on the regional banks as potential candidates to be the ones too small to bail out."

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