Wall Street slides as mortgage worries hit banks

NEW YORK (Reuters) - U.S. stocks posted their biggest loss in two months on Tuesday on fears banks might be on the hook for billions of dollars in souring mortgage bonds. The afternoon selloff hit investors already reeling from an unexpected credit tightening by China and disappointing financial results from Apple (NasdaqGS:AAPL - News) and IBM (NYSE:IBM - News).
The biggest scare came on news that Bank of America (NYSE:BAC - News) and possibly others may be forced to take back billions of dollars in mortgages that should not have been bundled into bonds.
"It's reminding investors of what was the main impetus for the horrific selloff we had a few years ago," said Eric Kuby, chief investment officer at North Star Investment Management in Chicago. "If you were recently struck by lightning, you are a little skittish when there is a thunderstorm."
Bank of America shares fell 4.4 percent to $11.80 after a Bloomberg report, citing people familiar with the matter, said investors PIMCO and BlackRock as well as the New York Federal Reserve Bank were seeking to force the lender to repurchase $47 billion in mortgage bonds. The bank, the New York Fed and PIMCO declined to comment.
The Dow Jones industrial average (DJI:^DJI - News) dropped 165.07 points, or 1.48 percent, to 10,978.62. The Standard & Poor's 500 Index (^SPX - News) lost 18.81 points, or 1.59 percent, to 1,165.90. The Nasdaq Composite Index (Nasdaq:^IXIC - News) fell 43.71 points, or 1.76 percent, to 2,436.95.
Apple's shares fell 2.7 percent to $309.49 and weighed on the Nasdaq after iPad sales fell short of some analysts' expectations. Only the day before, Apple shares hit a lifetime high.
International Business Machines Corp was lower after it won fewer technology service deals than expected in the third quarter. Its shares were down 3.4 percent at $138.03, even though it announced stronger profits and raised its full-year outlook.
Shares of Apple and IBM had advanced sharply heading into the earnings reporting season.
IBM shares rose 16 percent from the end of August until its financial results late on Monday, while Apple shares jumped 30.8 percent during that time and the S&P 500 was up 12.9 percent.
The foreclosure mess overshadowed earnings from Bank of America, which joined its two biggest rivals in reporting stronger-than-expected operating earnings on declining credit losses.
Also reporting earnings, Goldman Sachs Group Inc (NYSE:GS - News) said net trading revenues fell by more than a third in the quarter, but the company's profits still beat analysts' estimates, sending its shares up 2 percent to $156.72.
China's decision to hike interest rates drove the dollar higher as investors cut exposure to risk. That put downward pressure on commodities and related stocks. Oil company Exxon Mobil (NYSE:XOM - News) fell 1.8 percent to $65.12 while the S&P energy index (SNP:^GSPE - News) lost 2.4 percent.
The selloff came on high volume in a pattern similar to last week's when fears over banks surfaced.
About 9.76 billion shares traded on the New York Stock Exchange, the American Stock Exchange and the Nasdaq -- above the year's average so far of about 8.77 billion.
Declining stocks outnumbered advancing ones on the NYSE by a ratio of nearly 5 to 1. The ratio was about the same on the Nasdaq.