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Financials Fall on Jobs Report


Banks that have heavy consumer exposure are doing worse than those that don't.

Financial stocks took a beating today after the disappointing jobs report was released. Consumer-oriented banks are particularly sensitive to the labor market. Citigroup (C) shares led the biggest US banks downward, dropping 2.56% today. The Financial Sector Select SPDR ETF (XLF) declined 1.60% and the KBW Bank Index (^BKX) fell 1.85%.

New York and Delaware Attorneys General Eric Schneiderman and Beau Biden are investigating several banks including JPMorgan Chase (JPM) and Bank of America (BAC), for improperly foreclosing on homeowners (after failing to package mortgages into bonds as they were advertised to investors).

American International Group (AIG), the insurer that was crippled by the collapse of the subprime bubble and was subsequently bailed out by the federal government, said that first quarter profits doubled on a yearly basis to $3.2 billion or $1.71 per share. Analysts expected a profit of just $1.19 per share. Despite beating on earnings, AIG shares fell 4% today.

A Delaware judge ruled that Bank of America can offer a $20 million settlement to shareholders who sued the bank for allegedly overpaying in the $50 billion purchase of Merrill Lynch. When Bank of America acquired the investment bank in 2008, it inherited about $50 billion in losses, which the shareholders allege CEO Ken Lewis misled them about. The judge denied the Delaware plaintiffs' attempt to stop the settlement in New York, leaving the dispute in the hands of the New York judge, who will be considering the case today.

Donald Jones, a Sterne Agee & Leach credit analyst, said that Morgan Stanley (MS) faces a 75% chance of a two-step downgrade from Moody's by the end of June. Such a downgrade would raise the bank's borrowing costs and tighten credit spreads.

"We expect that Moody's will downgrade most if not all of the firms put on watch in February, however we think the downgrades will rest at the 'better end' of the spectrum," Jones wrote in a note to clients. "Part of this expectation is in light of generally positive first-quarter 2012 results."

Jones puts the likelihood of a three-notch downgrade at 5-15%. A one-notch downgrade is inevitable, he says.

Facebook is meeting with its main underwriters, JPMorgan Chase, Goldman Sachs (GS), and Morgan Stanley to go over the talking points for the social networking company's upcoming IPO roadshow.

Twitter: @vincent_trivett
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