March 1, 2024

DealBook: BNP Paribas Profit Falls 13% in Second Quarter

A BNP Paribas branch in Paris.Chris Ratcliffe/Bloomberg NewsA BNP Paribas branch in Paris.

PARIS — Europe’s deepening debt crisis curbed trading revenue at the French bank BNP Paribas, pushing its net profit down by 13 percent in the second quarter compared to the same period last year.

Net income in the three months through June 30 fell to 1.85 billion euros, or $2.27 billion, from 2.13 billion euros a year ago, France’s largest bank said on Thursday.

Revenue from its advisory and capital markets operations, a mainstay of its business, slumped 33 percent to 1.2 million euros.

“Against a general background of crisis in the capital markets and strong volatility, there was less demand from clients and the businesses were managed cautiously,” the bank said.

At the same time, BNP Paribas said it had also significantly shored up the amount of capital regulators are requiring it and other financial institutions to hold in reserve against a worsening of the crisis.

The bank said it had completed 90 percent of a restructuring plan designed to bring in funds to lift its capital cushion to 9 percent by the end of the year to conform with new regulations.

Since the middle of last year, BNP Paribas, like other European banks, has moved to reduce its exposure to the crisis by shedding large amount of sovereign bond holdings from Greece and other troubled countries to help protect its capital levels. The bank took a write-down of 3.2 billion euros on Greek government debt in 2011.

BNP Paribas said its risk-related costs had fallen more than 20 percent in the first six months of 2012 compared to a year ago, to 1.8 million euros. That included a hit of 534 million euros it took in marking down the value of its Greek bond holdings in the second quarter of 2011.

The French bank said it continued lending into economies where it operates despite the difficult economic environment. As consumers reduced spending and stashed more money in their bank accounts, BNP Paribas said its commercial business was marked in particular by a growth trend in deposits across all its networks.

Revenue was stable at 3.96 billion euros compared to the second quarter of 2011, while operating expenses fell 1.2 percent from a year earlier.

In early morning trading in Paris, shares in the French bank rose 1.6 percent.

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DealBook: Credit Agricole to Sell Private Equity Unit

The clearance sale of European bank assets continues.

On Friday, Crédit Agricole agreed to sell its private equity unit to Coller Capital, a private equity firm.

The deal comes shortly after the European Banking Authority told the Continent’s financial firms that they would have to find $153 billion in additional capital to comply with regulatory requirements, a move that has caused many banks to consider unloading noncore assets. Crédit Agricole, which didn’t disclose the sale price, said Friday that the sale of its private equity unit would reduce its risk-weighted assets by 900 million euros, or about $1.2 billion.

Crédit Agricole’s decision to offload its private equity business, known as CAPE, “forms part of a plan to optimize capital allocation and refocus the bank’s private equity activities on local business,” the bank said in a statement.

The sovereign debt crisis in Europe, and resulting volatility around the globe, has taken a large toll on Crédit Agricole. The bank said Wednesday that it would eliminate 2,350 jobs, and that it would likely report a loss on the year as a result of a $3.2 billion write-down connected to losses in its investment banking division. Its rival French bank, Société Générale, is also said to be planning job cuts.

The deal is expected to be approved in the first quarter of 2012.

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Sovereign Debt Turns Sour in Euro Zone

Now, the political and financial crisis engulfing the Continent has turned much of that European sovereign debt into the latest distressed asset, sending tremors through global financial markets not seen since the demise of the investment bank Lehman Brothers more than three years ago.

This week, shortly after European leaders formally conceded that Greece could not pay its debts and forced banks to accept losses, the shock waves reached Italy, the third-largest economy in the euro zone after France and Germany. And despite frantic efforts by politicians to contain the damage, market analysts said that France, one of the strongest countries in the euro zone, may soon feel the impact.

“When people started buying more European sovereign debt, there was not a cloud in the sky,” said Yannis Stournaras, director of the Foundation for Economic and Industrial Research, based in Athens. Now, he said, “This crisis is going to last because the perceptions of risk have changed dramatically.”

European banks face tens and possibly hundreds of billions of dollars in losses on loans to nations that use the euro. Worried about even greater losses if the crisis worsens, the banks have been scrambling to reduce their holdings of an investment that, like triple-A-rated subprime mortgage bonds, was once thought to be bulletproof.

The French bank Société Générale, for instance, this week marked down 333 million euros of its Greek sovereign debt holdings and in October slashed its exposure to that country to 575 million euros, from 2.4 billion euros at the beginning of 2011. Another French bank, BNP Paribas, has cut its holdings of Italian government debt 40 percent since July, to 12.2 billion euros.

How European sovereign debt became the new subprime is a story with many culprits, including governments that borrowed beyond their means, regulators who permitted banks to treat the bonds as risk-free and investors who for too long did not make much of a distinction between the bonds of troubled economies like Greece and Italy and those issued by the rock-solid Germany.

Banks had further incentive to overlook the perils of individual euro zone countries because of the fees they earned for underwriting sovereign debt sold to other investors. Since 2005, several dozen banks in Europe and the United States have earned $1.1 billion in fees from selling bonds for European governments, according to Thomson Reuters and Freeman Consulting Services.

Like other investors, banks clung for a long time to the seemingly inviolable belief that all the countries using the euro would make good on their debts. For years, Greek and Italian bonds did not pay much more than German ones, but banks were always hungry to chase even a fraction of additional profit. For much of the last decade, they bought the higher-yield bonds, ignoring the growing political and fiscal problems of those countries as well as other peripheral euro zone nations like Ireland, Spain and Portugal.

Regulators bear much of the responsibility. Before 1999, when Europe forged its monetary union, regulators permitted banks to treat as risk-free the debt of any country that belonged to the Organization for Economic Cooperation and Development, a club of developed nations that includes the United States and most of Europe.

“There was encouragement from European authorities for banks to load up on more debt, because it was seen as safe,” said Nicolas Véron, a senior fellow at Bruegel, a research firm in Brussels. “In hindsight, it was unwise risk management.”

Some regulators realized that allowing banks to set aside no capital for sovereign defaults could be a problem and moved to address it in a 2006 accord known as Basel 2. They mandated that big, complex banks use their own models to determine if individual countries were at risk and hold some capital against them. But the European Union never enforced the stiffer regime. And amid the subprime mortgage crisis, Europe’s regulators added to the problem by demanding that banks hold more safe assets, much of it sovereign debt.

As a result, banks were not discouraged from placing their most liquid assets “into the worst possible government debt,” Achim Kassow, a former Commerzbank board member, wrote in a study published by the European Parliament.

Liz Alderman reported from Paris and Susanne Craig from New York.

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DealBook: UBS Reports $2 Billion Loss by Rogue Trader

A security guard stands in front of a UBS bank in London on Thursday.Andrew Winning/ReutersA security guard in front of a UBS bank in London on Thursday.

8:43 a.m. | Updated UBS said on Thursday that a rogue trader in its investment bank had lost $2 billion, a fresh blow to the beleaguered Swiss bank.

The police in London have arrested a European equities trader, Kweku Adoboli, in connection with the case, according to a person with direct knowledge of the situation who was not authorized to speak publicly.

The incident raises questions about the bank’s management and risk policies at time when it is trying to rebuild its operations and bolster its flagging client base. The case could also bolster the efforts of regulators who have pushing in some countries to separate trading from private banking and other less risky businesses.

The revelation about the rogue trader comes as the bank tries to regain its financial footing. Last month, UBS announced it would shed 3,500 jobs, following poor second-quarter results. In an internal memo, the bank said the unauthorized trading could drag down earnings in the third quarter to a loss, adding that “no client positions” were involved in the “unauthorized trading.”

“It’s a shock, a real negative surprise,” said Panagiotis Spiliopoulos, head of research at the private bank Vontobel in Zurich. “People thought that after the bank had been revamped following the 2008 crisis, it was set up in a way that could avoid this kind of event.”

Shares of UBS dropped more than 8 percent on Thursday, while the broader European banking sector was up.

The UBS rogue trading case is the biggest such incident in Europe since Jérôme Kerviel’s unauthorized trades in equity-linked futures at the French bank Société Générale in 2008. Mr. Kerviel was convicted last October of breach of trust and other crimes and sentenced to at least three years in prison. He was also ordered to pay restitution of 4.9 billion euros ($6.7 billion), the amount the bank lost in unwinding his trades

In connection with the UBS matter, the police in London arrested a 31-year-old man on suspicion of fraud by abuse of position. While the authorities did not release his name, the bank confirmed that the person arrested was the trader in question and that he had worked in London.

UBS said the matter was still being investigated and did not disclose other details. Regulators declined to comment on the trades or the markets in the case.

Analysts have offered conflicting theories on his trades, with some suggesting they involved stock-related financial products and others pointing to derivatives in the foreign exchange market, which is worth an estimated $4 trillion a day.

“The question that will be posed is how could this happen given the fact that all banks have committed to reduce proprietary trading,” said Rainer Skierka, an analyst a Sarasin, another private Swiss bank, referring to the practice of firms trading with their own money. “The next question is how the supervisor’s line of control works.”

Mr. Skierka said the loss was unlikely to materially affect the capital position of UBS. The bank — with 38.7 billion Swiss francs ($44.2 billion) and a Tier 1 ratio of 18 percent, based on criteria from the Bank for International Settlements — is among the strongest worldwide.

“It’s more about the timing — given current discussions in the Swiss Parliament on the ‘too big to fail’ problem of systemically relevant banks — and reputational issues,” he said.

Swiss lawmakers this autumn are due to debate new rules designed to shore up their two giant banks, UBS and Credit Suisse. Those contentious laws are of particular importance to the Swiss, because banks there generated 6.7 percent of the country’s gross domestic product in 2010, according to the Swiss Bankers’ Association.

There had been calls in the country for the banks’ investment units to be split from their deposit taking sides. But those proposals fell by the wayside and were replaced with plans for tighter capital adequacy rules.

British regulators have been informed of the UBS trading case and are in contact with their Swiss counterparts, the Swiss Financial Market Supervisory Authority. Tobias Lux, a spokesman for the Swiss authority, could not be reached for comment.

UBS has been struggling to turnaround its operations after the crippling events of 2008 when it was forced to accept government support. Earnings at the financial firm fell to 1 billion francs in the latest quarter, from 2 billion francs in the period a year earlier. In a move to cut costs, the bank announced in late August that it would eliminate 3,500 jobs, with 45 percent coming from the investment banking unit.

This latest episode will present an immediate challenge to a management team that is in flux.

Axel Weber, a former Bundesbank chief, is set to take over as chairman from Kaspar Villiger next year. And the UBS chief executive, Oswald Grübel, who was brought out of retirement to stabilize the bank in 2009, is expected by analysts to follow Mr. Villiger into retirement in the next couple of years.

Julia Werdigier and Chris Newens in Paris contributed reporting.

The internal UBS memo:

Dear colleagues,

We regret to inform you that yesterday we uncovered a case of unauthorized trading by a trader in the Investment Bank. We have reported it to the markets in line with regulatory disclosure obligations. The matter is still being investigated, but we currently estimate the loss on the trades to be around 2 billion US dollars. It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected.

We understand that you have already had to contend with unfavorable, volatile markets for some time now. While the news is distressing, it will not change the fundamental strength of our firm.

We urge you to stay focused on your clients, who are counting on you to guide them through these uncertain times.

We want to reassure you that we, together with the rest of the management, are working closely with the Investment Bank’s management and risk and controlling to get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has happened. We will keep you updated on the progress of our investigation.

The Group Executive Board

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DealBook: Gundlach Says He Made Backup Plans Ahead of Firing

Jeffrey GundlachTim Boyle/Bloomberg NewsJeffrey Gundlach

Jeffrey Gundlach, a prominent bond fund manager, testified on Monday that he began making backup plans in case he was fired by his employer, the Trust Company of the West.

In a civil trial pitting Mr. Gundlach against TCW, as the company is better known, he testified that he had been in talks to move part of TCW’s fixed-income division to the Western Asset Management Company, also known as Wamco, before he was fired by TCW in December 2009. The discussions about hiring Mr. Gundlach were known as “Project Artwork” within Wamco, and Mr. Gundlach’s team was known as “Gallery,” a nod to his appreciation for fine art.

Mr. Gundlach said that he was making plans to leave TCW only because he thought its parent company, the French bank Société Générale, was preparing to sell the firm.

“I thought this was an extremely dangerous development, and I was scared,” Mr. Gundlach said, according to a live feed of the trial in a Los Angeles court that was shown on CourtroomView.

TCW is suing Mr. Gundlach and three other former employees for more than $375 million in damages, accusing them of stealing trade secrets and conspiring to set up a rival firm, DoubleLine Capital. Mr. Gundlach is seeking more than $500 million in a countersuit contending that TCW fired him to keep his lucrative fees from his fixed-income funds.

In his second day of testimony, Mr. Gundlach also said that he offered to buy a 51 percent stake in TCW in September 2009 for $350 million. In e-mails from that month that were shown to the jury, he told a colleague, Barbara VanEvery, that he felt “forever vulnerable” at TCW, where he had worked since 1985.

“Eliminating that vulnerability is the goal now,” he wrote, adding that he had come to this realization during a yoga class.

On Monday, lawyers for TCW sought to show that Mr. Gundlach, who has referred to himself as “the pope” and “the godfather,” was plotting to start his own firm long before he was fired. The seven men and five women on the jury were shown e-mails between Mr. Gundlach and his lieutenant, Philip Barach, in which Mr. Gundlach accused Marc I. Stern, TCW’s chief executive, of trying to drive a wedge between the two men.

“You deserve better. I deserve better. We deserve better. It’s really an easy decision now,” Mr. Gundlach wrote.

“I agree,” Mr. Barach replied. “But at least now we have the luxury of time to plan and prepare.”

When asked about the e-mails, Mr. Gundlach said that he was only referring to the decision to begin making contingency plans.

In Monday’s testimony, Mr. Gundlach also spoke about a trip he arranged to Marfa, Tex., in the western part of the state, for members of his fixed-income team at TCW.

Lawyers for TCW have argued that Mr. Gundlach used this trip to continue planning his departure from the firm.

Jurors were shown e-mails sent by Mr. Gundlach in which he instructed a co-worker to pick up gourmet cheese and sausage for the trip, including a type of gourmet cheese that was made using “2 different milkings.”

Mr. Gundlach said that the Marfa trip was unrelated to any sort of TCW business.

During cross-examination by his lawyer, Mr. Gundlach gave the jury an overview of the mutual fund industry, and spoke about the process of setting up DoubleLine in December 2009, including a partnership he formed with Oaktree Capital Management.

When asked about one of the claims made by TCW, that computerized systems used at DoubleLine to analyze mortgage-backed securities were copied from similar systems at TCW, Mr. Gundlach said the software was like Ernest Hemingway’s novel “The Sun Also Rises” in that once it was written, it would be easily recreated by the author.

He also dismissed claims that the trading systems were central to his investing process.

“I didn’t even have them installed on my workstation,” he said.

Mr. Gundlach’s testimony will continue on Tuesday.

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Source Sought for False Story on French Bank

That is the question that French politicians, business leaders and journalists — at least those who are left in Paris during the dog days of August — are asking, as they struggle to explain the plunge, which was accompanied by concerns about the country’s ability to pay back its debts.

The series, “End of the Line for the Euro,” looked at how a collapse of the single currency might play out, against the backdrop of French presidential elections next year. While the 12-part story was clearly labeled as fiction, it named real banks, like Société Générale, whose shares plunged 15 percent last Wednesday, prompting the bank to deny speculation that it was in financial trouble.

As market participants and journalists searched for possible reasons, the trail seemed to lead to London. There, The Mail on Sunday, a tabloid newspaper, had published an article in which it said Société Générale was “on the brink of disaster.” Société Générale and an Italian bank, UniCredit, were in a “perilous” state, the paper added, citing “a senior government source.”

Last Tuesday, two days after the report appeared, The Mail retracted it, writing, “We now accept that this was not true and we unreservedly apologize to Société Générale for any embarrassment caused.”

Readers of the fictional “End of the Line for the Euro” noticed that Société Générale and UniCredit were both named in the same passage in the series, in an imaginary conversation involving the hedge fund manager John Paulson, where he says that U.S. regulators have been raising concerns about the liquidity of the two banks.

On Wednesday, a journalist at the Reuters news agency, Natalie Huet, speculated about a possibility of a link between the tale in Le Monde and the story in The Mail on Sunday.

“The rumor of a collapse of SocGen could have come from a misreading of the summer series in Le Monde by The Daily Mail,” she wrote on the blogging site Twitter, referring to the weekday sister publication of The Mail on Sunday.

Ms. Huet subsequently clarified that her comment was based on the “words of traders” and was merely intended to relay a “funny and not impossible hypothesis.” She also specified that she had been commenting in a personal capacity and not on behalf of the news agency.

Ms. Huet did not respond to an e-mail requesting comment.

The story took off from there. On Thursday, the news agency Agence France-Presse asserted, in an article that it later killed, that the Le Monde series “was the source of false information that has largely contributed to Société Générale’s stock market drop.”

On Friday, the French economy minister, François Baroin, discussed the possible connection in a radio interview.

By the weekend, the talk had grown so loud that Le Monde was moved to defend itself in a front-page editorial by Erik Izraelewicz, its top editorial executive.

“The reality is that our fiction had nothing to do with this crazy rumor,” Mr. Izraelewicz wrote in the Sunday-Monday edition of Le Monde. “The paradox is that this case has come to illustrate something that our series denounced: the unacceptable role played by rumors in determining the fate of nations and businesses.”

In the series, the fictional collapse of the euro zone is fueled by market rumors — spread by British traders, to bring things full circle — that Germany intended to pull out of the euro zone. That set in motion a disastrous cycle of events.

The scrutiny comes at an awkward time for Le Monde, less than a year after it was taken over by a group of French business executives with links to the opposition Socialist Party, and less than a year before French presidential elections, which are set for next May. (In the fictional series, the voting results in disaster for the Socialists, who finish third behind the incumbent, President Nicolas Sarkozy, and the National Front leader, Marine Le Pen.)

Even before the series ran, from late July through early August, it was the subject of complaints from Le Monde journalists, who issued a news release to protest the decision by Mr. Izraelewicz to give the plum assignment to a reporter at La Tribune, a business newspaper that he previously edited. Mr. Izraelewicz was named to the top job at Le Monde in February.

Société Générale actually fared better in Le Monde’s fiction than another French lender, Crédit Agricole. That bank wrote a letter of complaint to the newspaper after it was portrayed as requiring a costly bailout.

The French market regulator, the A.M.F., is investigating the source of the speculation about Société Générale, which was accompanied by talk, denied by ratings agencies, that France’s triple-A credit status might be at risk.

Société Générale declined to elaborate on the nature of the investigation, which came at its request. “Regarding the unfounded rumors circulating on the bank, Société Générale received the public apology from the Mail on Sunday, recognizing that their article was not true, and the group made a request to the A.M.F. — which was accepted — to open an enquiry into the origin of these irresponsible rumors,” the bank said in a statement.

As for The Mail on Sunday, a senior executive, who insisted that he not be identified because he is not an official spokesman, dismissed talk of a link to the series in Le Monde. Neither the paper’s reporters nor its sources had been aware of “End of the Line for the Euro,” the executive said.

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Growing Concern Over France’s Top Credit Rating Spreads Market Anxiety

Shares of French financial institutions were hammered Wednesday on the Paris stock exchange on mounting fears that France’s own sterling credit rating could be cut, if the cost of cleaning up the European debt crisis weighs on the nation and its banks.

French banks are loaded up on the debt of Italy and Greece, among other troubled European countries that share the euro.

It seemed not to matter that the French government — along with the credit raters Standard Poor’s, Moody’s and Fitch — issued statements on Wednesday insisting France’s rating was not at risk. The market anxieties spread wildly, engulfing Société Générale, the second-largest French bank. Its shares slumped as much as 21 percent before closing down by 14.7 percent.

Stock in BNP Paribas, France’s largest bank, fell 9.5 percent.

President Nicolas Sarkozy interrupted his vacation on the French Riviera to return to Paris for an emergency meeting with finance officials to discuss “the economic and financial situation” of France, whose government debt and budget deficit make it look the weakest of any big AAA-rated nation.

Mr. Sarkozy gave his ministers a deadline to prepare measures to ensure that France meets its deficit reduction targets, which it had trouble doing in the past. Analysts say France also needs to stoke growth and cut its high sovereign debt, which S. P. cited in its note accompanying the American downgrade on Friday.

That note projected that France’s debt in the year 2015 would be 83 percent of its gross domestic product — even higher than the 79 percent S. P. forecast for the United States by that year.

S. P. also indicated that it expected France and other AAA-rated nations to have their debts and deficits more under control than the United States by then. But the vultures now circling France apparently did not read, or at least heed, that caveat.

“There has been a lot of market noise about France, rather than ratings agency noise,” said Gary Jenkins, a strategist at Evolution Securities. “On the other hand, there was market noise about the PIGS and the United States before they were downgraded,” he noted, using an acronym for the European countries swept up in the debt crisis — Portugal, Ireland, Greece and Spain.

The annual cost to insure $10 million in French government debt against default jumped to a record $175,000 on Wednesday, up from only $100,000 three weeks ago. The cost also hit records for Société Générale and BNP Paribas.

French banks are among the most exposed to Greek, Spanish and Italian debt, and they also hold huge amounts of French sovereign debt.

Société Générale, a globally interconnected bank that the French government regards as too big to fail, moved closer to the eye of the storm recently. It has significant exposure to Greece through a retail subsidiary there, and it holds vast sums of troubled debt from small and large European economies.

On Wednesday, it was hit in particular by talk that Groupama, a large French insurer that owns about 4 percent of Société Générale, needed to raise money. Groupama did not return calls for comment.

But David Thébault, head of quantitative sales trading at Global Equities in Paris, noted that many other European insurance companies, as well as banks, were scrambling after S. P. downgraded the United States to AA+ from AAA. Many of those companies and banks need to replace their United States Treasury securities because they are required to hold only top-rated sovereign debt.

“Volatility is very high — we’re in quasi-crisis mode,” he said.

Société Générale issued a lengthy statement after the close of trading, saying it “categorically and vigorously” denied all the “completely unfounded” market rumors that affected its share price. The bank, which reported a 1.6 billion euro ($2.28 billion) first-quarter profit last week, said it had asked the French stock market regulator to investigate the source of the rumors.

The big fear in the markets, though, is the threat of contagion — whatever the reason for the tumult.

“We’ve been really cautious, and the sovereign crisis is now escalating,” said Philip Finch, global bank strategist for UBS. “It boils down to a crisis of confidence. We haven’t seen policy makers come out with a plan that is viewed as comprehensive, coordinated and credible.”

Despite France’s undisputed influence as Europe’s biggest power broker next to Germany, its debt as a percentage of gross domestic product is expected to reach 85.3 percent this year, according to the International Monetary Fund. That would be the highest among any European country in the AAA club.

France’s budget deficit, meanwhile, will hit 5.7 percent of G.D.P., the I.M.F. said, well above the 2.3 percent forecast for Germany, and the second-highest in Europe after Britain.

And despite an array of world-class companies like LVMH Moët Hennessey Louis Vuitton, L’Oréal, Renault and Danone, France’s economy is gripped by labor market rules and other factors that keep it from growing faster.

The economy is expected to grow only 2 percent this year and next, slower than the 3.4 percent pace of Germany. Unemployment is around 9 percent.

Mr. Sarkozy pledged on Wednesday to find new ways to cut the deficit and reduce France’s huge debt ratio, which would swell if a widening crisis forced France to supply tens of billions more euros to pay the cleanup bill. But just as President Obama’s speech on the American economy on Monday fell on deaf ears, so, too, did markets ignore Mr. Sarkozy’s promises.

The French president has made it a priority to avoid a sovereign debt downgrade on his watch, especially as he girds for a campaign in the presidential elections scheduled for 2012.

Mr. Sarkozy has emphasized France’s strong stewardship of the European crisis. But that could come back to haunt his political ambitions if the crisis devours his own country.

David Jolly contributed reporting from Paris, Nelson Schwartz and Louise Story from New York and Landon Thomas Jr. from London.

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Stocks End Sharply Lower Amid Fears About Europe

After sweeping declines on Monday were followed by huge gains on Tuesday, stocks on Wall Street finished steeply lower on Wednesday as each of the three main indexes dropped more than 4 percent. Wednesday’s trading completely wiped out the gains of the previous day in the broader market as measured by the Standard Poor’s 500 index.

The last time there were three consecutive days of 4 percent moves on the SP was in October 2007.

In the United States, the financial sector again took a beating, shedding more than 7 percent.

Analysts said a variety of worries have clouded the markets in recent weeks, but on Wednesday they singled out fears about exposure to French banks as a factor as shares in those institutions dropped during European trading. The concern is whether big countries like France in the heart of Europe might now be called upon to bail out their own banks as well as economies like Spain and Italy.

“Today it’s fears about French banks and France,” Michael Gapen, United States economist at Barclays Capital in New York, said, singling out the French bank Société Générale, whose shares fell about 18 percent. “SocGen is the name that is really driving trading.”

The plunge on Wall Street on Wednesday, a day after the biggest daily gain in the Dow and Standard Poor’s 500 index since March 2009, drove home a powerful message to investors: For now, at least, in this market, a rally has no basis to last.

Stocks on Tuesday had turned around, racing up after Monday’s steep declines, in response to a Federal Reserve announcement that, while it would not be coming to the rescue with some new program to stimulate the economy, it would leave rates low until the middle of 2013.

“The market psychology is such that investors no longer seem to know who or what to root for and all that they do know is, according to the Fed, that rates will remain low until the middle of 2013,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company.

In recent weeks, investors have been focused, to varying extent, on factors including the Standard Poor’s downgrade of the United States credit rating; weak data related to the United States economy; and contagion fears related to the euro zone’s fiscal problems. Some said that the market was already unsettled, and that the downgrade and the debt ceiling negotiations that preceded it made things worse, or that the downgrade had already been priced in by the market but added another layer of uncertainty over how the domestic and global economies would be affected.

For its part, the Fed is hoping that its statement, which three of the 10 members of the Federal Open Market Committee voted against, will encourage investment and risk-taking by keeping the cost of borrowing extremely low until at least mid-2013. Still, it suggested that the United States monetary authorities are now adopting the same policy pursued by the Bank of Japan over the last decade with marginal effect.

“It has been a very eventful two-week period,” said Robert S. Tipp, managing director and chief investment strategist for Prudential Fixed Income.

“What the markets began to digest though with the downgrade, and have continued to chew on with the Fed’s announcement yesterday, is the fact that the economy really is in much worse shape than most people realized,” Mr. Tipp said.

He said those developments have “taken the wind out of the sails of the equity market” and pushed yields lower.

On Wednesday, the Dow was down 519.83 points, or 4.6 percent, at 10,719.94. The Standard Poor’s 500-stock index fell 51.77 points, or 4.42 percent. at 1,120.76. The Nasdaq were was down 4.09 percent, or 101.47 points, at 2,381.05.

The action in government bonds highlighted where investors were calculating their priorities. Even after the credit rating downgrade, the flight from risky assets heated up, with a rise in 10-year government bonds prices rose. Yields declined to 2.14 percent from 2.25 percent on Tuesday, when the yield also reached fell to 2.03 percent.

“It is rivaling the lows hit at the end of ’08,” said Mr. Tipp, referring to the yield. “You are basically at historic lows here.”

Bruce Bittles, the chief investment strategist for Robert W. Baird Company was watching what he described as “waterfall” declines on the monitors following the stock market on Wednesday. He said the debt ceiling problems and downgrade by the S.P. set off underlying market-moving concerns about another recession that had already existed, as well as worsened the uncertainty about what further action the government and central bank could take.

“The government has used up a lot of bullets,” he said, “And the problem is its global in nature.”

The markets now need to see corrective government policy action on the fiscal and debt problems, he added.Gold, a traditional safe haven, surpassed $1,800 an ounce at one point during the day. And the VIX, a measure of the fear in the markets, sharpened to 42.9 from its level of 35 on Tuesday.

On Wednesday, Asian markets drew from the strong rally on Tuesday in the United States and rose but European shares fell back.

The Tokyo benchmark Nikkei 225 stock average rose 1.2 percent. The main Sydney market index, the S. P./ASX 200, gained 2.6 percent. In Hong Kong, the Hang Seng index rose 2.5 percent, and in Shanghai the composite index added 0.9 percent.

The FTSE 100 Britain closed at 5,007.16, down 157.76 points, or 3.05 percent. The DAX Germany closed at 5,613.42, down 303.66, or 5.13 percent. The CAC 40 France closed at 3,002.99, down 173.20, or 5.45 percent.

The downturn in Europe was led by banking shares. French banking stocks dropped amid rumors that a downgrade of France’s AAA credit rating was imminent, but the agencies and the French government have said France is not in danger of a downgrade.

In addition to the decline in the French bank Société Générale, its rival BNP Paribas fell more than 9 percent. Intesa Sanpaolo, the Italian lender, fell almost 11 percent.

Laetitia Maurel, a spokeswoman for Société Générale, said the bank’s fundamentals remain strong, with a first-half 2011 net profit of 1.663 billion euros, even after booking losses for its share of the Greek rescue.

Graham Bowley, David Jolly and Bettina Wassener contributed reporting.

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