Goldman Warning on Banks Drags Wall St Lower

Stocks fell on Tuesday as Goldman Sachs warned that banks may need to raise an additional $65 billion, stoking worries about further fallout from the mortgage crisis.

Goldman said the global credit crisis will not peak until 2009 and lowered its price targets for 14 banking companies. It also cut 2008 earnings-per-share forecasts for 11 banks.

Shares of Bank of America (BAC.N), whose target price was cut by Goldman, tumbled 2.5 percent and were the biggest drag on the S&P 500.

The warning on the outlook for banks offset the market's upbeat reaction to Goldman Sachs Group Inc's (GS.N) release of its own quarterly earnings, which exceeded Wall Street expectations even though they were down 11 percent from a year earlier.

"The market is unlikely to go higher without participation from financial stocks. You have funding and write-down issues with the financials," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto, Canada.

The Dow Jones industrial average (.DJI) dropped 75.96 points, or 0.62 percent, to 12,193.12. The Standard & Poor's 500 Index (.SPX) slipped 5.13 points, or 0.38 percent, to 1,355.01. The Nasdaq Composite Index (.IXIC) fell 8.53 points, or 0.34 percent, to 2,466.25.

The S&P financial index (.GSPF) fell nearly 2 percent.

Shares of Bank of America (BAC.N), the No. 2 U.S. bank, were down 68 cents at $29.63. after Goldman cut the bank's profit forecast.

Goldman also lowered its price targets on Wachovia Corp (WB.N) and Washington Mutual (WM.N). Wachovia shares slid 3.9 percent, and WaMu shares skidded 5.0 percent.

Volatile oil prices added to the negative tone on Wall street.

"Oil is an enormous headwind," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. "You see the conversation going from oil to the agriculture/commodity space and that's dominated by corn, with the floods in the Midwest."

U.S. crude (.CLc1) see-sawed, rising above $134 a barrel before falling back to $133.34.

Shares of travel services and credit card company American Express (AXP.N) weighed on the Dow, dropping more than 3 percent to $43.05.

On Nasdaq, shares of Adobe Systems (ADBE.O) dropped almost 3 percent to $41.64, a day after the design software maker offered a revenue outlook that disappointed investors.

On the economic front, a government report showed a higher-than-expected reading in overall producer prices in May, but the data also showed that the core Producer Price Index, which excludes volatile food and energy prices, moderated as economists had forecast.