Outlook: Housing is weakest link as more banks falter

The U.S. banking industry, both the cause of much of the nation's economic malaise and its greatest victim, was left reeling yesterday.

A horrid day on Wall Street and in the international markets ended with experts predicting even more carnage for banks and other financial institutions. The topics were largely limited to "how much more" and "who else." The range of assessments was huge.

Treasury Secretary Henry M. Paulson Jr., attempting to calm investors, said the American people could remain confident in the "soundness and resilience in the American financial system." But, Paulson added, "until we stem the housing correction . . . we will continue to have turmoil in the financial markets."

Bankruptcy guru Wilbur Ross predicted on CNBC that 1,000 regional banks could fail. Other economists pegged the looming failures at 50 to 300 regional banks.

On a day when renowned Wall Street firm Lehman Bros. Holding Inc. declared bankruptcy and Merrill Lynch & Co. Inc. surrendered its independence to Bank of America, which bought it, concerns were raised about a number of other banks.

Bank stocks in particular were hammered as the stock market tumbled.

Negative attention, and not for the first time, fell on certain financial institutions, among them the largest bank in the Philadelphia area. Wachovia Corp. shares fell 25 percent and so did another troubled big bank, Washington Mutual Inc..

Speculation and anxiety focused on American International Group Inc., or AIG, the giant insurance company that has exposure to insurance claims from Hurricanes Ike and Gustav, but far more pressing concerns. Some observers said AIG could be the next big financial institution to falter.

AIG shares lost 61 percent of their value in regular trading, and New York authorities loosened rules to allow the company to tap $20 billion in subsidiary assets to stay in business. AIG, which operates the National Union Fire Insurance Co. in Pittsburgh, closed at $4.76, down $7.38. The company's shares recovered slightly in after-hours trading.

"It's not like they have excessive [insurance] claims," said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte. "What's going on is the same thing that's going on in the banking industry. They are writing down their assets because they've got assets that are not worth what their balance sheet says they're worth."