NEW YORK ( TheStreet) -- Following more downgrades from Standard & Poor's and a report of a coming $10 billion lawsuit by American International Group (BAC - Get Report) over mortgage-based securities losses, Bank of America (BAC - Get Report) led bank stocks down on Monday, with shares plunging over 20% to close at $6.53, following last week's 16% decline.
Investors hammered the banking sector in reaction to the downgrade of Standard & Poor's long-term debt rating for the United States to AA+ from AAA, even though federal bank regulators said immediately after S&P's announcement that banks' capital requirements wouldn't be affected by the downgrade.S&P said in a statement early Monday that "the immediate effect" of its downgrade of U.S. treasury paper would "be neutral to banks," in light of the regulators' guidance on bank capital and because the Federal Reserve would "continue to accept Treasuries as collateral for overnight borrowings, with no capital penalty." The ratings agency also said that "due to the downgrade, longer-term interest rates will likely start to rise gradually, as buyers of Treasury bonds demand higher rates to compensate for the added riskiness of U.S. Treasuries," but that with U.S. treasuries maintaining their status as the "preferred place for flight-to-safety movements...the net effect should be a slight increase in long-term rates. " S&P said that it expected "bank net interest margins to increase slightly, going forward," with loan quality "unchanged by the downgrade." Those comforting words had no effect on the market, as investors remained quite sour on the banking with the KBW Bank Index (I:BKX) down 11% to close at 36.99, after last week's 10% decline. The best performer among the 24 index components was Commerce Bancshares (CBSH), which was down "only" 6% to close at $35.86. Regions Financial (RF - Get Report) saw its shares drop 14% to close at 4.41, following last week's 16% decline. Regions stands out as the only large publicly traded bank holding company still owing federal bailout funds received through the Troubled Assets Relief Program, or TARP. The company owes the U.S. Treasury $3.5 billion. Capital One (COF) was down 12% to close at $37.63, as even a credit card lender with strong profits can't hold back investor onslaught when facing the prospect of a decline in consumer sentiment and spending. The shares declined 10% last week. SunTrust (STI) was down 14% to close at $18.53, following last week's 12% decline. JPMorgan Chase (JPM - Get Report) were down 9% to close at $34.13, following a 7% pullback for the shares last week. KBW analyst David Konrad said that JPMorgan was a good pick in the current environment. Shares of Wells Fargo (WFC - Get Report) -- which Konrad also likes -- were down 9% to close at $23, after sliding over 9% last week. Kevin Petrasic, a partner in the Paul Hastings Global Banking practice, told TheStreet that a consequence of S&P's downgrade "one consequence may very well be a more conservative banking sector posture that impacts lending," which could hurt "small business lending activities, which, of course, goes to the heart of job creation." Petrasic added that the U.S. could "see a vicious downward cycle if we fail to get our house in order by putting a credible deficit reduction plan in place." The private mortgage insurers were quite volatile, with PMI Group (PMI) up 15% to close at 29 cents, after the stock tanked 75% last week on word that its main private mortgage subsidiary was undercapitalized. MGIC (MTG) was down 40% to $2.90, following last week's 20% drop, and Radian (RDN) was down 30% to $1.99, following a 13% decline last week. American International Group -- which also has a major presence in the private mortgage insurance space -- was down 10% in afternoon trading to $22.61, following last week's 13% decline.
Philip van Doorn. To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.