Economy concerns push preferreds down 9.6% on average; Bank of America topples on AIG suit

By Stephanie N. Rotondo

Portland, Ore., Aug. 8 - Preferred stocks experienced "a truly historic day," a market source reported Monday. The market fell 9.6%, according to Wells Fargo's preferred stock index.

At one point, preferreds were down as much as 15% during Monday trading.

"Our gut is that even in 2007 and 2008, there was never a day when we were down 15%," the source said. He noted that the index "hit the lowest level since the beginning of July [2010]."

"Everything is just getting beat to hell," said another trader. Investors were "scared of banks," resulting in massive losses for both U.S. and foreign banks but especially for names like Bank of America Corp. and Ally Financial Inc. Fannie Mae and Freddie Mac also got whacked after Standard & Poor's downgraded the government-sponsored entities as well as any agency with ties to U.S. government-backed debt.

"All the financials are getting crushed because of downgrades and the threat of a double recession," the trader said.

"I don't have any words of wisdom except 'duck'," he added. Still, he noted that while most issues "got hammered," the recent weakness has resulted in "a good buying opportunity - if you have got the stomach for it."

"The timing of the downgrade couldn't have been worse," added a third preferred trader, speaking of S&P's downgrade of the U.S. government's credit rating late Friday. He said that last week saw an influx of exchange-traded fund, mutual fund and hedge fund redemptions as well as retail redemptions.

"The major guys are sitting on cash, which is good, but they are not doing anything," he said, remarking that sellers outnumbered buyers five to one.

Bank of America under fire

Bank of America preferreds were already smarting from the recent debt-ceiling debacle when word came Monday that American International Group Inc. is suing the bank for more than $10 billion.

The lawsuit seeks to recover losses tied to mortgage-backed securities. AIG alleges that Bank of America, as well as its Merrill Lynch and Countrywide Financial units, falsely represented the quality of its mortgages.

"It was beyond hammered," a market source said of Bank of America's preferreds, several of which were among the day's largest percentage losers.

The series I preferreds linked to Merrill Lynch (NYSE: BMLPI) dropped $4.42, or 21.38%, to $16.25. The 5.5% "baby bonds" (NYSE: IKL) meantime fell $5.02, or 21.31%, to $18.54, while the 5.8% $25-par notes (NYSE: IKM) declined $4.97, or 21.07%, to $18.63.

The bank's series H depositary shares (NYSE: BACPH) closed $2.61 weaker, or 10.48%, at $22.30. Trading volume in the issue was 2.89 million shares. At one point, the depositary shares hit a low of $17.72 before rebounding nearly $5.00.

Bank of America has been hit with a slew of negative news of late. Last week, New York's attorney general said an $8 billion mortgage settlement with the bank was not nearly good enough and that the office intended to challenge the deal. On top of that, rumors have been swirling that the company needs to raise as much as $50 billion of new capital in order for it to be compliant with the new Dodd-Frank regulations.

The bank has denied that it needs new funds. It is also decrying AIG's lawsuit.

According to one market source, there is even more fuel for the fire as another rumor makes the rounds.

"There is a nasty rumor circulating around," he said, though he added that "we pay no weight to it."

Still, chatter has it that Bank of America might soon skip or miss a preferred dividend payment.

"I had not heard that," said another trader, who added that "I would be very surprised if they did that."

Ally preferreds drop

Ally Financial paper got wrecked in Monday trading. One trader said it was "crazy."

"I don't know why the hell they are getting dumped on," he said, citing the company's recent earnings in which they reported tier 1 capital of around 14%.

"They are at ridiculous levels," said another trader.

The 8.5% series A preferreds (NYSE: ALLYPA) fell $3.20, or 13.33%, to $20.80, with about 2.62 million preferreds turning over. At one point, the preferreds fell below the $20.00 mark.

The 8.125% series B preferreds (NYSE: ALLYPB) closed down $4.33, or 19.97%, at $17.35 on volume of 2.03 million preferreds.

Fannie, Freddie downgraded

Following the United States' sovereign debt downgrade, agencies like Fannie Mae and Freddie Mac also saw their ratings knocked down a peg.

S&P placed the new ratings at AA+, down from AAA. The rating agency said the change reflected the agencies' exposure to economic volatility as well as the fact that their credit quality is heavily dependant upon the government being able to service its debt.

With Fannie and Freddie preferreds already trading in the low-dollar range, the news didn't do much to help, although a market source noted that "the damage was done way before now."

Freddie's 6.55% preferreds (OTCBB: FMCKI) fell 25 cents, or 12.82%, to $1.70. Fannie's preferreds (OTCBB FNMAS) decreased 50 cents, or 25%, to $1.50.

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