Financial Winners & Losers: Moody's

Moody's sinks on a computer glitch.
By Debra Borchardt ,

A computer glitch at

Moody's

(MCO) - Get Report

caused shares of the bond ratings company to plunge Wednesday and sent other financial stocks down as jittery investors began selling.

Moody's experienced a problem that caused some complex European financial instruments to be doled out higher ratings than they should have been given, according to

Reuters

. The error was discovered in early 2007 and the products were downgraded, but the news was never disclosed. The stock collapsed into its largest one-day drop since being spun off from Dun & Bradstreet. It ended the day down $6.99, or 15.9%, at $36.91.

Moody's glitch and continuing inflation worries pushed most financial stocks down as the

NYSE Financial Sector

index declined 171.01 to 7,334.06. Adding to the market's woes for the day, the

Federal Reserve

cut its forecasts for full-year growth by almost a percentage point and raised its estimates for inflation and unemployment.

The bond insurers fell in sympathy with Moody's as

MBIA

(MBI) - Get Report

crumbled 10.7% to $8.12 and

Ambac

(ABK)

slid 7.4% to $3.26. Mortgage insurance provider

Radian

(RDN) - Get Report

also took a step back, losing 7.1% to $4.96.

Investment banks also hit the skids on Wednesday after

The Wall Street Journal

suggested losses could become larger as hedge trades work against them. In an attempt to offset some of the damage caused by the subprime meltdown, many of the firms placed hedge trades which apparently could be going the wrong direction.

Lehman Brothers

(LEH)

could be leading the way with a potential $1.5 billion to $2 billion in losses and

Morgan Stanley

(MS) - Get Report

is not far behind. Lehman fell 5.8% to $39.56, and Morgan Stanley dropped 4.3% to $42.89.

Washington Mutual

(WM) - Get Report

gave back 4.4% to $9.40 after Moody's downgraded the rating on its covered bonds. This acion follows the recent downgrades of the senior unsecured debt of Washington Mutual Bank. The concern from Moody's is the increased potential exposure of covered bond investors to the risk of a liquidation of the cover pool in a short time frame in the event of a default.

Fitch Ratings assigned the top-notch rating on

Capital One Financial's

(COF) - Get Report

ability to manage and collect credit-card debt. But it wasn't enough to pull the stock out of the day's malaise as shares fell 3.6% to $47.98. Fitch said the "proficient plus" rating reflects the company's experience, strong brand awareness and quality controls.

One of the few winners on the day was student lender

Sallie Mae

(SLM) - Get Report

, which saw its shares jump 5.9% to $22.00 after news from the Bush administration that it would help private lenders. U.S. Treasury funds will be used to buy loans from the lenders and then invested in special loan-backed trusts.

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