Bank of America scare hits stocks

U stocks posted their biggest loss in two months yesterday on fears banks might be on the hook for billions of dollars in souring mortgage bonds.

The afternoon selloff hit investors already reeling from an unexpected credit tightening by China and disappointing financial results from Apple and IBM.

The biggest scare came on news that Bank of America and possibly others may be forced to take back billions of dollars in mortgages that should not have been bundled into bonds.

“It’s reminding investors of what was the main impetus for the horrific selloff we had a few years ago,” said Eric Kuby, chief investment officer at North Star Investment Management in Chicago. “If you were recently struck by lightning, you are a little skittish when there is a thunderstorm.”

Bank of America shares fell 4.4 percent to $11.80 after a Bloomberg report, citing people familiar with the matter, said investors PIMCO and BlackRock as well as the New York Federal Reserve Bank were seeking to force the lender to repurchase $47bn in mortgage bonds. The bank, the New York Fed and PIMCO declined to comment.

The Dow Jones industrial average dropped 165.07 points, or 1.48 per cent, to 10,978.62. The Standard & Poor’s 500 Index lost 18.81 points, or 1.59 per cent, to 1,165.90. The Nasdaq Composite Index fell 43.71 points, or 1.76 per cent, to 2,436.95.

Apple’s shares fell 2.7 per cent to $309.49 and weighed on the Nasdaq after iPad sales fell short of some analysts’ expectations. Only the day before, Apple shares hit a lifetime high.

International Business Machines was lower after it won fewer technology service deals than expected in the third quarter. Its shares were down 3.4 per cent at $138.03, even though it announced stronger profits and raised its full-year outlook.

Shares of Apple and IBM had advanced sharply heading into the earnings reporting season.

The foreclosure mess overshadowed earnings from Bank of America, which joined its two biggest rivals in reporting stronger-than-expected operating earnings.