Market drops as bond insurer fears hit financials

NEW YORK (Reuters) - Stocks fell on Wednesday, led by financial shares, after a television commentator said he believed that the two biggest bond insurers will lose their top credit rating, a move that could bring more big losses to the financial sector.

The remarks by CNBC reporter Charles Gasparino came in the last hour of trading, knocking down major indexes from nearly 1.5 percent gains wracked up after an aggressive interest rate cut by the Federal Reserve.

Shares of bond insurers Ambac Financial Group Inc and MBIA Inc each finished down more than 10 percent, which contributed to financial shares ending among the day's worst performers.

"Once he (Gasparino) started talking, we got the sell-off. As soon as that went across, those shares went down immediately," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

A credit downgrade of bond insurers could hurt further harm the banking sector and stunt the global economy as financial institutions take a hit from subsequent write-downs of their assets.

CNBC later posted a story on its Web site saying "it had learned" of possible bond insurer downgrades by Wall Street ratings agencies, without citing any source.

The Dow Jones industrial average dropped 37.47 points, or 0.30 percent, to 12,442.83. The Standard & Poor's 500 Index finished down 6.49 points, or 0.48 percent, at 1,355.81. The Nasdaq Composite Index declined 9.06 points, or 0.38 percent, at 2,349.00.

Shares of Ambac declined 17.01 percent to $10.73 on the New York Stock Exchange. Shares of MBIA fell 12.6 percent to $13.96.

FGIC Corp's bond insurance arm lost its top "AAA" rating from Fitch Ratings on Wednesday, adding to worries about the bond insurance sector. The downgrade is a blow to the insurer's business model and could also cause downgrades to more than 100,000 municipal bonds.

FGIC is owned by a group including mortgage insurer PMI Group Inc, whose stock slid 3.4 percent to $9.11 on the NYSE, and private equity firm Blackstone Group, whose stock dropped 1.8 percent to $18.65.

Shares of insurer American International Group declined 4.2 percent to $54.37, while those of Wachovia Corp slipped 2.8 percent to $36.84.