Financial Sector Weighs Down Wall Street

Updated from 11:34 a.m. EDT

After opening lower, stocks on Wall Street continued to lurk in negative territory, as bad news from financial firms weighed on sentiment.

The Dow Jones Industrial Average dropped 78 points to 11,704, and the S&P 500 lost 7 points to 1298. The Nasdaq lately edged down 3 points at 2437.

On the corporate front, a spate of negative headlines struck at several big financial names. Moody's downgraded Morgan Stanley's (MS Quote) debt rating after the close Monday, to A1 from Aa3, saying that Morgan did a poor job of managing risk during the credit crisis.

Offering further credit-related headwinds, Standard & Poor's cut its ratings on holdings of mortgage firms Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote), a move that could hurt the companies' efforts to raise additional capital.

Elsewhere in the financial space, Wachovia (WB Quote) said it would cut 600 more jobs and revised its second-quarter loss to $9.11 billion from $8.86 billion. The bank said it was increasing its legal reserves as it discusses a possible settlement with the government over its dealings in auction-rate securities.

Investment bank JPMorgan Chase (JPM Quote) said in a filing with the Securities and Exchange Commission that it was writing down $1.5 billion in mortgage-related assets.

Traders were also focusing on Swiss bank UBS' (UBS Quote) $331 million second-quarter loss. The company said it would split its investment-banking business from its wealth-management segment to quell customer concerns.

Michael Strauss, chief economist and strategist at Commonfund, said that the financial sector's negative headlines are a continuation of the same story. He said that the Federal Reserve's loan survey released Monday indicated that the financials continue to face challenges related to the weak housing market. "Call it a growth recession or whatever you want to call it," he said. "It's not just a challenge here, but it's a challenge internationally."