By Jonathan Stempel
NEW YORK (Reuters) - Bank shares tumbled Friday amid expectations that government efforts to stabilize the financial system won't keep economies worldwide out of a deep recession and that losses from bad loans will soar.
The sector was also rocked by the latest merger to save an ailing lender: PNC Financial Services Group Inc
"This is part and parcel of the eventual cleanout" of leverage in the financial system, said Marshall Front, chairman of Front Barnett Associates LLC in Chicago. "We are aware of hedge funds that are being forced to sell, and banks are forcing customers to bring margins up. Mutual funds are getting large redemptions, and exchange traders are under extreme pressure."
In early trading, the Standard & Poor's Financials Index <.GSPF> fell as much as 6.7 percent and neared its 12-year low, with carnage affecting the biggest names in U.S. finance, such as JPMorgan Chase & Co
Banks worldwide are trying to reduce balance sheet risk after taking on too many mortgages and complex debt, which no longer have buyers.
The industry has also seen soaring credit losses, which are likely to keep rising if housing prices keep falling, unemployment moves higher, and deteriorating economies make it more difficult for retail and business customers to pay bills.
"The markets are in the process of discounting a global recession and how severe it's going to be," Peter Cardillo, chief market economist at Avalon Partners in New York, said.
Before agreeing to a takeover by Pittsburgh-based PNC, National City had lost money for five straight quarters, battered by losses on mortgage and real estate construction loans.
It has also lost the confidence of some of its customers, suffering periodic outflows of deposits, including a $5.5 billion loss of core deposits in the July-to-September period.
Many analysts have said National City, which operates mainly in the U.S. Midwest and Florida, would be a good fit for PNC, which operates primarily in the mid-Atlantic region.
National City would join Bear Stearns Cos, Merrill Lynch & Co
Asked if the financial system is near the end of the deleveraging process, Front said, "It's within a shout."
In morning trading, PNC shares rose 86 cents, or 1.5 percent, to $57.74, while National City fell 63 cents, or 22.9 percent, to $2.12.
JPMorgan, which bought Bear Stearns and Washington Mutual's banking units, fell $1.19, or 3.1 percent, to $36.66; Citigroup fell 59 cents, or 4.5 percent, to $12.52, after earlier dropping to a 12-year low; Bank of America, which is buying Merrill, fell $1.25, or 5.4 percent, to $21.75; and Goldman fell $4.69, or 4.3 percent, to $103.89.
Merrill fell $1.26, or 7.2 percent, to $16.25; Morgan Stanley
(Additional reporting by Leah Schnurr; editing by John Wallace)
