Most stocks keep sinking, but big banks get a lift

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With less than 90 minutes to go in the trading session on Wall Street, it’s looking as grim as many market pros had expected.

The Dow industrials fell as much as 695 points early on, rallied back to a 90-point gain, and then quickly plunged again.

At about 11:40 a.m. PDT, the Dow was down 487 points, or 5.7%, to 8,091. The loss for the week so far: 21.6%.

‘I don’t see a rally’ by the closing bell, said Dan McMahon, veteran trader at Raymond James & Associates in New York. ‘They tried and it couldn’t hold.’

But there is one bright spot today: Many bank stocks are trading up, apparently as investors figure that whatever move governments make next to try to shore up the financial system, it will involve massive direct or indirect aid to the banks.

Two proposals the Group of 7 industrialized nations are expected to consider at their meeting in Washington this weekend: Guaranteeing all bank deposits, and guaranteeing banks’ debts.

Bank of America was up 51 cents to $20.14 at about 11:40 a.m. PDT. Other bank stocks trading higher include JPMorgan Chase, up $2.24 to $38.92; Citigroup, up 38 cents to $13.31; KeyCorp, up 66 cents to $7.08; and PNC Financial Services, up $2.83 to $62.68.

Whatever the G-7 countries decide, the market doesn’t believe it will be enough to save Morgan Stanley.

The brokerage’s shares have plunged for a fifth day on fears that it will follow Bear Stearns and Lehman Bros. into collapse. Moody’s Investors Service warned today that it might cut Morgan’s credit rating, which could be the final blow.

Morgan’s shares were down $5.18, or 42% to $7.27, despite assurances from Japan’s Mitsubishi UFJ Financial Group that its planned $9-billion capital infusion for Morgan remains on track.

Traders also are hammering Goldman Sachs, which was off $17.29 to $84.06.

If Morgan were to collapse, Goldman would be the last man standing among independent investment banks.