U.S. big-bank stocks, already outcasts on Wall Street this year, now are being tainted by Europe's debt woes.

The U.S. market’s decline on Monday was led by the financial sector, which tumbled in sympathy with the steep sell-off in many European bank stocks.

Bank of America’s shares slid 35 cents, or 3.3%, to $10.35, the lowest since May 2009 -- when the market was just beginning to recover from the 12-year lows reached in March of that year.

Morgan Stanley fell 72 cents, or 3.2%, to $21.58, the lowest since April 2009. JPMorgan Chase shares lost $1.31, or 3.2%, to $39.43, a seven-month low.

The chart below shows an index of 81 financial stocks in the Standard & Poor’s 500 index. The financial index is down 5.8% this year, the only one of 10 major industry sectors in the red for 2011. The S&P 500 overall is up 4.9% year to date.

Europe’s debt crisis is spreading from the smaller economies of Greece, Ireland and Portugal to the two biggest economies of southern Europe: Spain and Italy. Market yields on Spanish and Italian bonds have risen for six straight sessions as investors demand ever-higher returns to buy the countries’ debt.

As yields climb the risk is that it will become too expensive for Spain and Italy to roll over their existing heavy debt burdens at market rates. That’s what forced Greece, Ireland and Portugal to seek bailouts from the rest of the European Union over the last 14 months.

Andrew Busch, public policy analyst at BMO Capital Markets in Chicago, notes that many global investors already are assuming that Greece will have to default on part of its debt, which likely would mean losses for European banks that own Greek bonds.

But the prospect of Italy and Spain facing debt payment problems is mortifying for the financial sector. Italy’s debt still appears manageable, Busch said, “But perception is reality when it comes to these things.”

Federal Reserve Chairman Ben S. Bernanke said last month that major U.S. banks had little “direct” exposure to government debt of Greece, Ireland and Portugal. But even in those cases, he said, a “disorderly default in one of those countries would no doubt roil financial markets globally” as investors ran for cover.

For the big banks, the main fear is that the debt “contagion” could cause lenders to begin cutting off short-term credit to one another, as they did after brokerage Lehman Bros. failed in 2008. That could cause the financial system to seize up.

Benchmark short-term interest rates have risen in Europe in recent days. The so-called London Interbank Offered Rate, or LIBOR, rose Monday to 1.381% for one-month euro loans, up from 1.345% on  Friday. Some of that reflects the European Central Bank’s latest boost in its key rate, to 1.5% from 1.25% on Thursday. But the ECB’s move had been expected.

By contrast, LIBOR for one-month loans in dollars has been unchanged in recent days at 0.186%.

Even without Europe’s debt mess, U.S. big-bank shares have been market pariahs this year. A lack of loan growth, state lawsuits over alleged foreclosure abuses, a worsening housing market and regulatory pressures at the federal level have driven many investors away from the stocks.

JPMorgan Chase and Citigroup are due to report second-quarter earnings on Thursday and Friday, respectively. The question is whether they can tell investors anything new to dispel the dark cloud over their stocks.

-- Tom Petruno

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Gold: Trading now at $1,484 per ounce, down 1.3% from Thursday. Dow Jones industrial average: Trading now at 12543.83, up 1.0% from Thursday.

Ending a good week. Stocks are up again Friday morning on some strong manufacturing data. If the pace continues, this should end as the best week for the markets in a year.

Goldman's tentacles. Goldman Sachs increased the number of tentacles it has in regulatory bodies around the world when it hired former economists from central banks in Europe, England and Japan.

Bair's final warning. Bank regulator Sheila Bair used her last appearance in front of Congress to warn that financial regulators are not being given enough money to enforce last year's financial reform bill.

Paulson pressure. While hedge fund magnate John Paulson appeared to be a big beneficiary of Bank of America's big settlement earlier this week, reports are now indicating that he had pushed the bank to fight back against investors.

-- Nathaniel Popper

Photo: Wall Street. Credit: Spencer Platt / Getty Images

This post has been corrected. See the note at the bottom for details.

If Countrywide Financial co-founder Angelo Mozilo had sold former Bank of America boss Ken Lewis a kitchen sink, maybe they could have tossed that in there too.

Bank of America, which under Lewis bought Countrywide in 2008 for stock then worth $2.5 billion, said in a statement Wednesday that settling claims by holders of Countrywide mortgage securities would cost it an additional $14 billion.

That amount, to be recorded in Bank of America's second-quarter earnings, is just the latest in a long string of painful payouts stemming from the takeover of Countrywide, the Calabasas lender that once was the nation's largest writer of mortgages -- many of them of the subprime and liar loan varieties.

On top of an $8.5 billion payout to 22 institutional investors, which The Times reported on Wednesday, the $14 billion includes $5.5 billion to cover other demands by holders of mortgage securities.

[For the record, 9:55 a.m. June 29: An earlier version of the paragraph above incorrectly said $14 million; the correct figure is $14 billion. It also said the $14 billion included a $2.6-billion write-off.

Bank of America says it will report a second-quarter loss of $8.6 billion to $9.1 billion after recording $6.4 billion in additional mortgage-related charges, including a $2.6-billion write-off of its Countrywide investment.]

That follows a similar action in January, when B of A Chief Executive Brian Moynihan chopped $2 billion off the value of Countrywide on the bank's books.

All told, the settlement covers the Charlotte, N.C., bank's exposure to claims by holders of securities backed by 530 trusts stuffed with Countrywide mortgages with an original principal balance of $424 billion.

"This is another important step we are taking in the interest of our shareholders to minimize the impact of future economic uncertainty and put legacy issues behind us," Moynihan said in a statement. 

"We will continue to act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide."

Bank of America said the settlement would resolve "nearly all" of its exposure to claims that Countrywide misrepresented the riskiness of first mortgages backing bonds it sold to investors such as Newport Beach bond giant Pimco.

The bondholders to be paid off also include the Federal Reserve Bank of New York. The Fed wound up with them when JPMorgan Chase & Co. agreed to take over failed Wall Street giant Bear Stearns -- but only if the government pocketed Bear Stearns' most toxic securities.

There's still a lot of Countrywide liability left for Moynihan to deal with. In addition to securitized second mortgages, Bank of America still faces demands including those of mortgage insurers who claim they should be repaid for their Countrywide losses.

And let's not forget the borrowers who wound up in foreclosure on their Countrywide loans. Bank of America is among five major mortgage servicers that are negotiating with state and federal officials over botched foreclosure proceedings. The total settlement figues being bandied about for months now start at $5 billion and range upward of $20 billion.

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-- E. Scott Reckard

Photo: Rusty Bank of America sign in downtown L.A. Credit: E. Scott Reckard

Here's your that's-all-right-mama Thursday roundup of consumer news from around the Web:

--You can save money at the gas pump and consider yourself safe to boot. None of the 13 small, fuel-efficient cars recently tested by the Insurance Institute for Highway Safety were rated poor in any of the four key crash tests. Six of them were even given the coveted Top Safety Pick rating in their size class. The ratings are based on performance in front-, side-, rollover- and rear-impact evaluations. Cars that earn the top rating of good in each test and come with electronic stability control qualify for Top Safety Pick. Among the safest small cars: the 2012 Ford Focus, 2011 Hyundai Elantra, 2011 Lexus CT 200h hybrid, 2011 Nissan Juke and the 2011 Toyota Prius. The Dodge Caliber, Honda CR-Z and Insight hybrids, Nissan Sentra and Versa, Scion xD, and Suzuki SX4 also were rated but didn't come in as top safety picks.

--Speaking of saving money at the pump, it looks we'll be keeping a little more cash in our pockets this Memorial Day weekend. The national average price for unleaded regular gasoline was $3.81 a gallon on Thursday -- 9 cents less than it was a week ago, according to AAA. Consumers in California, Washington, Illinois and five other states are paying the highest prices, between $3.91 and $4.28 a gallon. The lowest prices, between $3.57 and $3.69 a gallon, can be found in Wyoming, Arizona, parts of the Midwest and the South. Pump prices are expected to drift lower through the holiday weekend, reflecting lower oil prices, which are down about 12% since the beginning of May. AAA predicts nearly 35 million Americans will travel 50 miles or more from home this Memorial Day weekend, a slight increase from 2010.

--Lastly, Bank of America customers with basic checking accounts should brace for a 34% increase in their monthly service charge. The bank is now charging $12, up from $8.95. BofA and other banks have been hiking fees (and adding new ones) to counter what they say are losses related to new regulations imposed on their practices. BofA will waive the monthly fee if you make at least one direct deposit a month into the account, but now you have to put in a bigger amount. In the past, that direct deposit could be any sum. Now it has to be at least $250. An average balance of at least $1,500 will also allow you to steer clear of the $12 monthly charge. Or you can perhaps pay a visit to your local credit union and see how they're prepared to compete for your business.

-- David Lazarus

Photo: Crash tests show that a car doesn't have to be big to be safe. Credit: Associated Press

Bank of America Corp. is replacing some debit cards with new cards, saying customer information may have been compromised.

The bank would not disclose the extent of the possible data breach or breaches involving the debit cards, which allow customers to pay for goods and services by immediately accessing funds in their checking accounts.

Two L.A. Times staffers said Bank of America contacted them Monday about potential problems with their debit cards.

One received an email that said the bank had "detected irregular activity." The email provided an 800 number at which an employee said, "Your card was part of a mass compromise," probably at a merchant where the cardholder had done business. 

The bank canceled the old card despite there being no sign of unauthorized use, the Times staffer said.

The other Times staffer received a new debit card in a letter that said the old one would be blocked after five days because the account might have been compromised.

In an interview, Bank of America spokeswoman Betty Reiss said the company does not disclose the scope of data breaches or discuss their details.

Reiss said the employee at the 800 number had been mistaken in describing a "mass compromise," but would provide no information on how the bank defines that term or how often its customers become victims of debit card fraud.

Bank of America notifies affected customers, as it has been required to do under California law since 2003.

"Through our fraud monitoring and based on information we receive from the card associations [such as Mastercard and Visa], we will notify a customer and block and reissue their card if we believe their card information has been compromised at a third-party location," Reiss said in an email. 

"We take these proactive steps to protect our customers from fraud," she said, adding, "Information we receive from the card associations does not include merchant name or location and we would not have that information to share with a customer."

Beth Givens, director of the Privacy Rights Clearinghouse, a San Diego nonprofit that tracks financial data breaches, advised bank customers to avoid using debit cards. 

Because identity thieves can use debit cards to drain checking accounts, cardholders can be left without any ready cash, she said. Banks say they'll replenish funds lost to fraud, but it sometimes takes them as long as a month to investigate thefts and replace customers' money, Givens said.

What's more, she added, the legal protections for victims of debit card fraud are weaker than those for credit card holders.

"The banks really push debit cards," she said in an interview, "but we suggest that people use cash or credit only."

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After ID theft, free fraud protection is worth it

-- E. Scott Reckard 

Photo credit: Reuters / Lucas Jackson