U.S., foreign stocks drop as financial problems spread

LONDON -- Investors, watching financial problems spread overseas, sent stocks tumbling Monday, despite Washington's $700 billion financial bailout plan.

U.S. stocks fell sharply as investors worried about the stability of the banking sector after Wachovia became the latest major U.S. bank to succumb to fallout from the credit crisis.

Investors feared the troubles facing the banking sector might worsen the economy's outlook and constrain lending, a key pillar of business and consumer spending and vital for profits.

The takeover of Wachovia's banking operations by Citigroup suggested that risks from the credit crisis were mounting, according to analysts.

"With the news on Wachovia this morning, Washington Mutual last week, it just seems a lot of these banks are getting whacked," said Cleveland Rueckert, market analyst at Birinyi Associates.

"People were hoping the bailout would be passed this morning. It still has to go to the House for the vote. People are apprehensive this morning that it might not get passed and we're going to continue to see bank failures."

Apple drove a tech rout after several brokerages slashed their recommendations on the tech bellwether.

Energy companies fell as crude dropped $6.66 to $100.17 a barrel.

On the London Stock Exchange, Europe's biggest, the FTSE 100 index plunged more than 3% by midday, sending the index below the 500 level. In Paris, the CAC 40 index was down more than 3% after noon, and the Frankfurt Dax was following suit.

Concerns over Europe's banking and credit woes — including a multi-nation rescue of one of Europe's biggest banks and the bailout of a second bank in Britain — were driving down markets, said Clem Chambers, CEO of ADVFN, Europe's leading stocks and shares website.

Earlier, in Asia, stocks rallied early, but the gains quickly vanished. By the end of trading, Hong Kong's benchmark Hang Seng Index had skidded 4.29%, to 17,880.68. Tokyo's benchmark Nikkei 225 fell 1.3% to 11,743.61. South Korea's KOSPI retreated 1.4% to 1,456.36.

The chilly reception in Asia "doesn't surprise me," said fund manager Marc Faber, publisher of the well-known investment newsletter The Gloom Boom & Doom Report, "because the bailout plan will not change the situation very much in the financial sector."

Shares of European banks and financial houses were dropping across Europe. Investors, Chambers said, don't know which banks are in good health, which ones are shaky and whether various rescue plans would ease the liquidity crisis.

"Everybody is dead scared," Chambers said. "Nobody knows where it's going to stop."

"There's no silver bullet for what's plaguing the financial markets," said William Kaye, managing partner of the Great Asia Hedge Fund in Hong Kong.

Kaye believes the U.S. government should have allowed financial institutions to fail if they made irresponsible bets on subprime mortgages and other risky investments.

"Why not let them go broke?" he said. "People who do stupid things should get punished." He said the Paulson bailout reminds him of the piecemeal way Japan let a banking crisis drag on throughout the 1990s by periodically rescuing banks instead of allowing them to go out of business.

Monday's plunge in European bank stocks came amid announcements that:

• The governments of Belgium, the Netherlands and Luxembourg are pumping $16.4 billion into Fortis to keep it solvent. The Belgian-Dutch bank and insurance company is one of Europe's 20 biggest banks.

• The British government is nationalizing troubled Bradford & Bingley, a mortgage bank specializing in loans to buyers of rental property. It was the second British taxpayer bailout of a mortgage lender in a year.

• The German government is guaranteeing credit that lenders are extending to liquidity-stressed Hypo Real Estate Holding, a Munich-based bank and property conglomerate.

Europe's big nations last week had rebuffed urgings from U.S. Treasury Secretary Henry Paulson to set up their own bailout plans similar to the $700 billion rescue effort Congress is to take up starting Monday.

German Finance Minister Peer Steinbrueck said last week that the year-old global financial crunch was a U.S. problem that it needed to solve. Europe's other big industrial democracies — Britain, France and Italy — agreed, he said.

However, British Prime Minister Gordon Brown hasn't ruled out following suit if the situation worsens.

Until investors know where banks stand, Chambers said, European markets will remain volatile."It will be shooting up one minute and down the next," he said. "There's going to be violent mood swings."

Contributing: Paul Wiseman reported from Hong Kong, Reuters