Dow, S&P dip as credit concerns nag

During the regular session, deteriorating mortgage debt resurfaced as an issue driving the market after Standard & Poor's warned it is more likely to cut credit ratings of Ambac Financial Group Inc (ABK.N: Quote, Profile, Research) and MBIA Insurance Corp (MBI.N: Quote, Profile, Research), two of the world's biggest insurers of bonds.

If these two companies are downgraded, the $1.2 trillion of debt they insure will fall in value.

Despite the blow to the market's overall confidence, downtrodden bank stocks rebounded on news that a Chinese sovereign wealth fund had bought a $5 billion stake in U.S. investment bank and brokerage Morgan Stanley (MS.N: Quote, Profile, Research).

Morgan Stanley takes $9.4bn hit

China's willingness to invest in Morgan Stanley was seen as a vote of confidence on Wall Street and the firm's shares rose 4% in Wednesday trading.

But the heavy losses will increase pressure on chief executive John Mack, who described the performance as "deeply disappointing" and said he would not accept a bonus for 2007.

The woes in the sector have already seen the firm's highest ranked woman, Zoe Cruz, leave the firm.

Other banks have also been hit, and Merrill Lynch's boss Stan O'Neal and Citigroup's chief executive Charles Prince have both left their posts recently.

"Huge write-downs caused the ouster of Stan O'Neal and Charles Prince," speculated Peter Cardillo, a market analyst at Avalon Partners.

"Maybe Morgan Stanley will follow them."

Sovereign investment

Morgan Stanley, which saw a $1.2bn write-down in the three months to the end of August, said that it still had about $1.8bn-worth of exposure to sub-prime mortgages on its books.

Over the past few weeks, a string of global banks have indicated how much they have lost as a result of exposure to investment products linked to US sub-prime mortgages.

So far announced losses have totalled over $70bn, but the final toll might be much higher.