Financial Stocks Lift Despite Bad Earnings

Wachovia announced multibillion-dollar losses related to the mortgage crisis Tuesday. But instead of upsetting investors, the news helped lift financial stocks and the rest of the market.

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DEBORAH AMOS, host:

A funny thing happened on Wall Street yesterday. Another big bank announced multibillion-dollar losses related to the mortgage mess. This time it was Wachovia. But instead of rattling investors, the news sent Wachovia stocks soaring almost 17 percent higher. Shares in other financial institutions also jumped. To explain what the market is thinking, we called NPR's Chris Arnold.

Good morning.

CHRIS ARNOLD: Hey, Deb.

AMOS: So explain. What is going on here?

ARNOLD: Well, you know, it's interesting how quickly the mood of the market can change. You remember just a week or so ago there was IndyMac bank had just failed and all over television there were lines of people around the block...

AMOS: Yeah, sure.

ARNOLD: ...worried they weren't going to get their money. And also, Fannie Mae and Freddie Mac, those two giant mortgage companies, there were some real concerns over, you know, had they just totally overextended themselves and, you know, were they falling apart. Their stock prices were tanking and investors were just really spooked.

AMOS: OK. So what changed?

ARNOLD: Well, over the past week there's been a string of not great but better than expected earnings reports. And those have come from some big banks - Citigroup, J.P. Morgan Chase, Bank of America, Wells Fargo, WaMu - after the market closed yesterday.

Also, Fannie Mae and Freddie Mac, you know, the government's come out and said we're going to prop those companies up. They're not going to fail. There was an independent review that showed that, you know, they're in basically not great shape but better shape than some people feared.

And the picture all that's painting is that, look, going forward there are going to be some companies that are in real trouble but a lot of others that are finding their footing. And that's encouraging. And the Dow's up more than 500 points in a week.

AMOS: But does this mean the mortgage crisis is over or it's just that these stocks are really cheap?

ARNOLD: Well, you know, nobody really knows where the market's headed. Some investors probably do think these stocks are cheap. They've fallen so far. But you have to remember a lot of these big financial stocks are still down more than 50 percent from where they were a year ago and a lot of them are still losing money. So they're not exactly out of the woods.

AMOS: All the headlines are about the big banks, but is there any good news in other parts of the banking sector?

ARNOLD: Well, you know, there are big banks and there are small banks. The worry was that a lot of these smaller and regional banks had sort of overextended themselves on construction loans. But the issue there, it's like the big banks. You know, you can't paint them all with the same brush. And some of those smaller and regional banks are coming out with earnings reports now that are better than expected. And many of their stocks have been bouncing back too.

AMOS: What does it say for the larger economy that the stock market is inching up again?

ARNOLD: Well, the thing is that businesses and people need to borrow money all the time. So the health of the banking sector is very important. If it becomes even a little bit harder to borrow money, you know, it's harder for you to go refinance your house and spend money building a new kitchen or something. And you know, it's harder for big companies to hire people and expand. And that's a drag. And it's one of the things that can push the economy from sort of teetering on recession to being in recession.

And bank stocks recovering here, you know, it helps relieve some pressure on the banks. But again, I mean we've still got a lot of problems in the economy. The housing market is a huge issue. We've still got a very big foreclosure mess on our hands. That's driving prices down. Seven hundred thousand homes every year are getting put back on the market through foreclosure sales. That number's probably increasing. And you know, as prices fall, that hurts banks and regular people. So the economy's still facing some pretty big problems here and it's unclear which way it's headed.

AMOS: Thank you very much.

ARNOLD: Thanks, Deb.

AMOS: NPR's Chris Arnold.

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