Long-present unease about soured loans bubbled over on Monday after Bank of America Corp. said it set aside $13.4 billion to cover lending losses, even as it posted a profit for the first quarter, and as anxiety grew about the results of the government's "stress tests" to determine if banks will need more government bailout money.
While Bank of America Corp. and other big banks like Citigroup Inc. have fared better so far this year than many believed they would, nervousness is growing now over the massive losses from defaulting loans that are yet to come. On Sunday, White House chief of staff Rahm Emanuel said some banks will need help.
Financial stocks suffered some of the day's worst declines: Bank of America plunged 24.3 percent and Citigroup fell 19 percent. Those two components of the Dow Jones industrial average contributed to a daily loss in the index of 290 points, or 3.6 percent. That was the biggest Dow drop since early March, before the market's big rally from nearly 12-year lows.
"The banking system cannot sustain the pace of loan losses that we're seeing today," Paul Miller of FBR Capital Markets told CBS News correspondent Anthony Mason.
The loss rate for credit card loans that banks have given up on has reached a record 8.41 percent, reports Mason. For three of the country's financial giants - Citigroup, American Express and Bank of America - it's more than 9 percent.
To cover those losses, banks are jacking up rates and fees, reports Mason Four million Bank of America cardholders will see their interest rates jump into double digits in June.
Joe Saluzzi, co-head of equity trading at Themis Trading LLC, said traders are skeptical about bank earnings and believe the better-than-expected profit reports may be disguising problems.
"They're looking at bank numbers and are saying they are not that great," Saluzzi said.
Traders have been looking for some pullback ever since the Dow jumped 24 percent from its early March lows. But that pullback could end up being more significant than a mere correction if the market cannot shake its concerns about banks. With the stress test results expected in early May, the market is likely to see more volatility.
Worries about banks' debt problems were aggravated by news reports that their lending remains tight and that the government may swap its debt in banks for ownership stakes as its $700 billion bailout fund runs down.
Because of the central role lending plays in keeping businesses of all kinds going, investors have been hunting for signs of a recovery in banks before they get more optimistic about the broader economy.
The market has been encouraged by early indications that a government drive for lower interest rates has been helping banks step up lending, but investors are still sensitive to any signs of trouble - including the comments from Emanuel and senior White House adviser David Axelrod, who said some banks "are going to have very serious problems."
Energy and materials companies also fell along with the prices of key commodities they rely on, such as crude oil.
The market declines were broad and deep, outweighing what would otherwise be positive news about a step-up in deal activity. After a deal with IBM Corp. didn't work out, troubled technology company Sun Microsystems, a leading maker of business software, while PepsiCo Inc. said it would bid $6 billion to buy its two biggest bottlers.
The Dow fell 289.60, or 3.6 percent, to 7,841.73.
Broader stock indicators also lost ground. The Standard & Poor's 500 index fell 37.21, or 4.3 percent, to 832.39, and the Nasdaq composite index fell 64.86, or 3.9 percent, to 1,608.21.
About 10 stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.8 billion shares.
Concerns about the sustainability of bank earnings weighed on financial stocks. Citigroup Inc. lost 71 cents to $2.94; JPMorgan fell $3.57 or 10.7 percent to $29.69 and American Express Co. fell $2.83 or 13 percent to $18.98.
Jeffrey Frankel, president of Stuart Frankel & Co. in New York, said the retreat in financial stocks is welcome after their massive gains from early March - he said too sharp a rise could endanger a long-term advance. Many bank stocks have doubled in only weeks.
"These banks have had a tremendous run," Frankel said. "Now you're hearing the bearish camp speak up a little bit."
Investors are also cautious about financials after The New York Times reported that the government might be forced to find ways to stretch the $700 billion allocated for the government's bank rescue fund by converting the government's loans into common stock. Such a move would give the government a controlling stake in banks and hurt existing shareholders by reducing the value of their shares.
Separately, The Wall Street Journal reported that banks receiving government bailout money are having a hard time making loans.
Wall Street was more upbeat about the Oracle deal, which carries a 42 percent premium to Sun's Friday closing stock price of $6.69. Sun jumped $2.46 or 36.8 percent to $9.15, Oracle slipped 24 cents or 1.3 percent to $18.82.
Beverage and snack maker PepsiCo Inc. offered to acquire Pepsi Bottling Group and PepsiAmericas in a move to cut costs. Pepsi lost $2.27 or 4.4 percent to $49.86 while Pepsi Bottling jumped $5.53 or 22 percent to $30.73 and PepsiAmericas surged $5.16 or 26 percent $25.04.
In earnings news, drug maker Eli Lilly & Co.'s first-quarter earnings rose 24 percent on higher sales of the antidepressant Cymbalta and as costs for Humalog, a form of insulin Lilly makes, remained flat. Shares slipped 76 cents or 2.3 percent to $32.99.
Light, sweet crude fell $4.45 to $45.88 a barrel on the New York Mercantile Exchange. That helped send Occidental Petroleum Corp. down $3.76 or 6.3 percent to $55.88, while Dow Chemical Co. fell $1.12 or 8.9 percent to $11.48.
In other market moves, the Russell 2000 index of smaller companies fell 26.88, or 5.6 percent, to 452.49.
Bond prices rose. The yield on the 10-year Treasury note fell to 2.84 percent from 2.95 percent late Friday. The yield on the three-month T-bill fell to 0.12 percent from 0.13 percent.
The dollar was mostly higher against other major currencies. Gold prices rose.
Overseas, Japan's Nikkei stock average rose 0.19 percent. Britain's FTSE 100 fell 2.5 percent, Germany's DAX index fell 4.1 percent, and France's CAC-40 fell 4 percent.