US banking stocks hit a five-year low yesterday, as the financial markets remained jittery following Lehman Brothers' news on Monday that it needs fresh capital. The market was also reacting to rumours that Goldman Sachs would report a hefty second-quarter writedown on its portfolio of mortgage-related investments on Tuesday.

Shares in Goldman Sachs fell by $4.76, or 2.85 per cent, to close at $162.45.

Lehman Brothers, which unveiled a much larger-than-expected $2.8 billion loss for the second quarter, saw its shares decline by $3.75, or 13.64 per cent, to close at $23.75.

The decline came amid concerns that Lehman may need to raise even more capital than announced at the beginning of the week, further diluting the ownership of the brokerage’s existing investors.

Confidence in Lehman was also hit by a note from Guy Moszkowski, a Merrill Lynch analyst, who lowered his recommendation on the group’s shares from “buy” to “neutral”, on the basis that the “business mix is poor for the environment”.

Meanwhile, Merrill Lynch suffered a 6.6 per cent share price decline as John Thain, its chief executive, said he was “comfortable” with the broker’s capital reserves but may still raise more money. Morgan Stanley fell 5.4 per cent on concerns about its second quarter results, due to be announced next Wednesday and expected to be down by about 60 per cent.

Overall, the S&P 500 financial index ended the day down 10.12 points, or 3.28 per cent, at 298.72, having rebounded slightly from a five-year low of 301.15 set earlier in the day. The Dow Jones industrial average dropped 206 points.

Adam Compton, an analyst at RCM Global Investors, said: “People had been confident that the worst was over for Lehman and then it shakes market confidence with its latest results. There are now rumours flying about everywhere as people worry about all sorts of things, such as whether Goldman may follow in Lehman’s footsteps.”

Lehman and Goldman declined to comment on the rumours.

Despite it all, analysts kept their forecasts for Goldman Sachs’ second-quarter results steady. Thomson Reuters is expecting the Wall Street brokerage to report a drop of at least 30 per cent in its profits.

The broader S&P 500 index dropped by 22.95 points, or 1.7 per cent, to close at 1,335.49, as concerns about the financial industry combined with fears about a rebound in the oil price.

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