Brokers Slumping Again

Brokerage stocks tumbled Friday as the credit crunch continues to weigh on the financial sector.

Shares of big Wall Street banks dropped 3%-5% in early action after another round of selling hit stocks in Europe and Asia. Central banks around the world responded by injecting cash into the banking system in hopes of averting a crushing round of margin calls.

But fears that the crisis is deepening were growing after Countrywide (CFC Quote - Cramer on CFC - Stock Picks) and Washington Mutual (WM Quote - Cramer on WM - Stock Picks) warned in regulatory filings that the collapse of demand for nonprime mortgage securities could hit their earnings.

Early Friday, Goldman Sachs(GS Quote - Cramer on GS - Stock Picks) and Merrill Lynch(MER Quote - Cramer on MER - Stock Picks) were down 1%-2%, while Morgan Stanley(MS Quote - Cramer on MS - Stock Picks), Bear Stearns(BSC Quote - Cramer on BSC - Stock Picks) and Lehman Bros(LEH Quote - Cramer on LEH - Stock Picks) were all down 3%-4%.

Bank stocks were hit less hard, with Citigroup(C Quote - Cramer on C - Stock Picks) and JPMorgan Chase(JPM Quote - Cramer on JPM - Stock Picks) down fractionally and Bank of America(BAC Quote - Cramer on BAC - Stock Picks) up a bit.

Meanwhile the government sponsored mortgage buyers Fannie Mae (FNM Quote - Cramer on FNM - Stock Picks) and Freddie Mac (FRE Quote - Cramer on FRE - Stock Picks) were up sharply once again, as talk swirls in Washington about their possible role in a bailout of troubled home loans.

The market for mortgage securities has essentially ceased to function over the last month. Bear Stearns said in July that two of its hedge funds tied to subprime-related securities were worthless and that it was refusing investor redemptions from a third mortgage-related hedge fund.

TheStreet.com reported on Thursday that Goldman Sachs was closing its North American Equity Opportunities Fund. The fund is one of many quantitative funds that made arbitrage bets in a bid to exploit inefficiencies in the market. These bets have been hammered in a market buckled by worries about liquidity.

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