NEW YORK - Stocks fell on Tuesday after a major brokerage warned that U.S. banks would have to raise as much as $65 billion in capital to shore up balance sheets weakened by the mortgage crisis.
Raising capital could dilute the equity stakes of current shareholders, and shares of U.S. banks sold off across the board. The KBW bank index, which encompasses U.S. banks, fell 3.7 percent.
Adding to the bearish tone of the market were concerns about the impact of Midwestern floods, with railroad operators including Union Pacific Corp among the worst-hit shares.
Shares of Bank of America, whose target price was among those cut by Goldman as it warned on continued losses from the global credit crisis, tumbled 3.6 percent, and were the biggest drag on the S&P 500.
"Any time a major investment bank cuts its prognosis for banks that certainly will weigh on the market," said Tom Schrader, managing director of U.S. equity trading at Stifel Nicolaus Capital Markets in Baltimore.
The Dow Jones industrial average closed down 108.78 points, or 0.89 percent, at 12,160.30. The Standard & Poor's 500 Index finished down 9.21 points, or 0.68 percent, at 1,350.93. The Nasdaq Composite Index ended the session down 17.05 points, or 0.69 percent, at 2,457.73.
Goldman Sachs warned the global credit crisis will not peak until 2009 and lowered its price targets for 14 banking companies. It also cut 2008 earnings-per-share forecasts for 11 banks.
The warning on the outlook for banks offset the market's upbeat reaction to Goldman Sachs Group Inc's release of its own quarterly earnings, which exceeded Wall Street expectations even though they were down 11 percent from a year earlier.
Adding to the downbeat tone were worries about the impact of Midwestern floods on companies ranging from food manufacturers to retailers and railroad operators. The flooding in the region, the worst in 15 years, has damaged unknown miles of railroad track and bridges.
Union Pacific Corp, the No. 1 U.S. railroad, fell 4.7 percent to $72.47, and Burlington Northern Santa Fe fell 2.8 percent to $102.21.
After the close of the market, Union Pacific said that the Midwest flooding is expected to reduce its second-quarter earnings per share by about 5 cents, driving earnings toward the bottom half of the guidance range it provided in April.
The floods have hit millions of corn and soybean acres in the Midwest. Potential payouts to farmers with crop insurance were seen also potentially burdening financial stocks.
"Insurance companies and the banks that provide the (crop) insurance could potentially suffer some setbacks," said Schrader. "That's going to compound and already damaged financial system; I think that's also weighing on financials."
Shares of American International Group, the world's largest insurer, fell 5.1 percent to $32.28. A.M. Best cut its rating on AIG, citing concern over its recent change in top management.
Goldman in its warning on banks also lowered its price targets on Wachovia Corp (WB.N), which closed 5.4 percent lower at $17.16, and on Washington Mutual, which fell 7.9 percent to $6.22.
Bank of America dropped $1.08 to $29.24.
On Nasdaq, shares of Adobe Systems dropped 3.4 percent to $41.40, a day after the design software maker offered a revenue outlook that disappointed investors.
On the economic front, a government report showed a higher-than-expected reading in overall producer prices in May, but the data also showed that the core Producer Price Index, which excludes volatile food and energy prices, moderated as economists had forecast.
Shares of home builders fell after the government said U.S. housing starts in May fell to their lowest pace since March 1991, and permits for future building also slipped.
Economists said the data indicated home building could decline by another 15 percent in the coming months.
The Dow Jones home construction stock index fell 0.8 percent
Trading volume was light on the New York Stock Exchange, with about 1.09 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion. On the Nasdaq, about 1.81 billion shares traded, below last year's daily average of 2.17 billion.
On the New York Stock Exchange, advancers beat decliners by a ratio of about 7 to 5. On the Nasdaq, about seven stocks rose for every four that fell.