SAN FRANCISCO (Reuters) – The historic initial public offering of Facebook Inc did not go as planned on Friday, as the social networking company’s sky-high valuation combined with trading glitches left the stock languishing near its offering price at the market close.

Facebook shares, which opened up 11 percent, closed at $38.23 after a nail-biting last half hour of trading when the shares dipped to their $38 IPO price. Most investors had predicted a first-day pop.

More than 576 million shares changed hands, setting a trading volume record for U.S. market debuts.

The company had priced its IPO at the top end of its target range and increased the size of the offering, becoming the first U.S. company to go public with a valuation greater than $100 billion.

Facebook founder and Chief Executive Mark Zuckerberg, 28, who retains voting control of the company and whose personal net worth is now about $20 billion, marked the debut of his company’s shares at the company’s Silicon Valley campus, symbolically ringing the opening bell for stock trading on Friday morning.

Wearing his trademark black hoodie, Zuckerberg hugged and high-fived Sheryl Sandberg, Facebook’s chief operating officer, who is credited with bringing crucial business discipline to a company founded in a Harvard dorm room eight years ago.

The area outside Facebook’s offices was packed with throngs of photographers, more than a dozen television trucks, and a TV news helicopter hovering overhead.

Outside of Nasdaq headquarters in New York, crowds also gathered, even as exchange officials struggled to sort out technical problems related to the huge volume of orders, which delayed the start of trading in the stock by 45 minutes and left investors guessing for more than two hours about whether their buy and sell orders had actually been executed.

The shares attracted interest from investors of all stripes, reflecting the social network’s extraordinary growth and deep store of information about its 900 million users.

The IPO minted thousands of new paper millionaires among Facebook’s 3,500 employees — and a handful of billionaires among its founders and early investors.

But the stock debut took place in a weak market, and traders said the smaller-than-expected first-day pop reflected the very aggressive pricing of the offering and a last-minute, near 25 percent increase in the number of shares being sold. Analyst predictions of first-day gains had ranged from 10 percent to 50 percent.

“The increase in size was a big negative factor for us,” said Tim Ghriskey, chief investment officer at Solaris Asset Management, who said he canceled some orders for the shares.

The IPO price was equivalent to more than 100 times historical earnings, compared with Apple Inc’s 14 times and Google Inc’s 19 times. For many investors that made it a risky bet.

“We have got some unhappy guys out there,” said Wayne Kaufman, chief market strategist at John Thomas Financial, a retail broker on Wall Street. “They were hoping for Facebook to be considerably better. I bet there are a lot of disappointed people in the market.”

Market participants said that in the final run-up to the IPO, much of the demand was from retail investors rather than institutions. When the stock fell to $38 on Friday morning, traders say the IPO’s lead underwriter Morgan Stanley stepped in to prevent the price from slipping below the IPO level.

From Facebook’s perspective, a small increase in the stock showed it was priced perfectly for Zuckerberg and early investors, who pocketed maximum gains and left little of the easy money on the table.

“You want to price the offering correctly. Institutional buyers get a little bump and the company raises the right amount of money,” said Kevin Hartz, co-founder and CEO of Eventbrite, an online ticketing startup that is integrated with Facebook’s platform. “If the stock has a massive bump on day one that means you misread market demand and company does not raise the right amount of money.”

BATTLE OF THE GIANTS

Facebook faces many challenges as it takes its place beside Google, Apple and Amazon.com Inc as one of the giant public companies defining the next-generation Internet economy. Google in particular views Facebook as a mortal threat and is moving aggressively to integrate social networking features across its products.

At the same time, scores of young companies are building new products and services, in some cases on top of the Facebook platform and in some cases in competition with it, and attracting huge amounts of investment capital.

A handful of such so-called Web 2.0 companies, including Zynga Inc, LinkedIn Corp, Yelp Inc and Groupon Inc, have already gone public, and others have been acquired by the industry giants.

In a sign of the volatile nature of highly valued Internet stocks, all these shares fell on Friday in sympathy with Facebook’s weaker-than-expected debut. In particular, social gaming company Zynga, which relies on heavily on Facebook and also provides more than 10 percent of Facebook’s revenues, fell by more than 14 percent.

In an indication of the land grab now under way in the Internet world, Facebook in April spent $1 billion to acquire Instagram, a tiny photo-sharing company with lots of users but no revenue. A Facebook rival, social scrap-booking site Pinterest, raised money earlier this week at a valuation of $1.5 billion in a sign that venture capitalists and other private investors still see enormous potential in Web 2.0 companies.

Facebook’s formidable assets include 900 million users around the world, many of whom spend hours a day on the site and share enormous amounts of personal information. That in turn enables Facebook to target its advertising to peoples’ specific interests, and many analysts believe the huge store of personal information gives Facebook an advantage that Google and other cannot match.

“Literally everything you see on the Internet, you could see inside Facebook — but done with much more of the social graph built into it,” said Siva Kumar, CEO of e-commerce company TheFind. “In a way they operate the mall, and everybody in the mall will pay some way or the other to Facebook.”

Facebook posted $3.7 billion in revenue in 2011 and $1 billion in profit. Analysts say the company has untapped opportunities in mobile computing, and potentially other Internet services such as email and search. Zuckerberg, though unproven as a public company CEO, is widely admired as a product visionary who has done a masterful job in continually improving the Facebook experience.

Skeptics, though, note that only a small percentage of Facebook users respond to advertising on the site. Google retains a big advantage in that regard, because advertising related to specific Internet searches is by nature far more relevant and thus more valuable.

In a sign of the challenges ahead for Facebook, the nation’s third-largest advertiser, General Motors Co, said last week that it was canceling its paid advertising on the site.

Global Equities analyst Trip Chowdhry said the stock debut was “lackluster” because Facebook’s growth prospects do not justify a high stock valuation. “They have serious technology and business model problems. Facebook is overhyped and drinking its own Kool-Aid,” he said. “They are only getting $4.39 per user per year. Google gets almost $30 per user.”

In Silicon Valley, though, the conventional wisdom is that Facebook and its social media brethren will be an increasingly important force in the business world for many years to come.

Already, the influx of wealth arising from Facebook’s extraordinary growth has helped drive a mini-boom in San Francisco Bay Area real estate, and income tax revenues related to the IPO will cut the state of California’s budget deficit by an estimated $2 billion.

(Additional reporting by Edwin Chan in San Francisco, Yinka Adegoke, Ed Krudy and Olivia Oran in New York; Editing by Jonathan Weber, Steve Orlofsky and Tiffany Wu)

NEW YORK (Reuters) – Stocks fell on Friday after a sloppy debut by Facebook Inc spoiled hopes that a spectacular open for the most-anticipated stock sale in years would brighten the mood in what has been a gloomy month for equity markets.

Shares of Facebook, the social networking giant, were volatile in the busiest day ever for a trading debut. After early gains of more than 10 percent, Facebook shares fell back to the $38 issue price, ending up just 0.6 percent at $38.23.

It was the Nasdaq’s most actively traded stock, with more than 566 million shares traded.

“When Nasdaq started running into some problems early on before Facebook opened – when there was a sense they kept putting it off, putting it off, the market did come under a little bit of pressure because people were getting nervous about it,” said Ken Polcari, managing director at ICAP Equities in New York.

The S&P 500 dipped below 1,300, seen as a key support level, for the first time since mid-January. Investors were cautious before leaders of the Group of Eight nations met about the euro zone debt crisis.

After delays in the scheduled start of Facebook trading raised anxiety levels among traders and onlookers outside Nasdaq’s headquarters, the stock opened at $42.05, compared with an initial public offering price of $38 a share. It rose as high as $45 before pulling back.

Investors were left in the dark about whether their buy and sell orders on Facebook went through as the Nasdaq did not tell broker/dealers whether opening trades had been executed. Nasdaq did not disseminate execution data until 1:50 p.m. (1750 GMT).

“The fact that there is this much interest in a big capital raise, an event like this is good for the markets overall,” said Gordon Charlop, a managing director at Rosenblatt Securities in New York.

The S&P 500 fell for a sixth straight day and recorded its worst week since November on growing concerns that global growth will suffer from the euro zone’s problems and signs of a slowing U.S. recovery.

The broad index has dropped 7.3 percent so far in May.

The Dow Jones industrial average dropped 73.11 points, or 0.59 percent, to 12,369.38. The Standard & Poor’s 500 Index lost 9.64 points, or 0.74 percent, to 1,295.22. The Nasdaq Composite Index fell 34.90 points, or 1.24 percent, to 2,778.79.

For the week, the Dow fell 3.5 percent, the S&P 500 declined 4.3 percent and the Nasdaq was down 5.3 percent.

Markets are awaiting the G8 meeting when leaders of the world’s major industrial economies convene near Washington this weekend.

They will confront the continuing crisis in the euro zone, including the increasing likelihood of a Greek departure from the bloc.

“Domestically we are kind of in a lull in a sense that we are between Fed periods and earnings, so to try to find direction, one of the things that seems to be jumping up at guys is macro, global. And right now that’s not wonderful,” said Charlop.

Shares of companies in the online social media sphere declined. LinkedIn fell 5.7 percent to $99.02 and Groupon Inc lost 6.7 percent to $11.70. Zynga plunged 13.4 percent to $7.16 after being halted twice during the session.

Biotechs stumbled, weighed down by an 10.9 percent drop in Sequenom Inc to $4.25 after the company said insurer Coventry Health Care Inc terminated an agreement to provide coverage for a prenatal test for Down Syndrome. The NYSEArca biotech index dropped 2.2 percent.

Shares of Foot Locker jumped 8.3 percent to $30.33 after the athletic footwear retailer posted higher-than-expected quarterly results.

Winnebago Industries Inc advanced 1.8 percent to $8.66 after receiving an unsolicited buyout offer from North Street Capital LP, the investment firm of racing car enthusiast Alex Mascioli, valuing the No. 1 U.S. motor home maker at $321.5 million.

Volume was strong with about 8.8 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, above the daily average of 6.83 billion.

Declining stocks outnumbered advancing ones on the NYSE by 2,297 to 728, while on the Nasdaq, decliners beat advancers 1,791 to 699.

(Editing by Kenneth Barry)

(Reuters) – JPMorgan Chase & Co‘s decision to radically change the way risk was measured in its Chief Investment Office is likely to dog the bank in the developing crisis over the big trading losses it has suffered.

The move, which allowed the bank to disguise the level of risk that the CIO was taking in its trading, could become a major focal point of investigations by the U.S. Securities and Exchange Commission and the FBI, former regulators said. It also will likely become part of investor cases in lawsuits against the bank and its executives.

When JPMorgan Chief Executive Jamie Dimon announced on May 10 that the company had lost at least $2 billion through “egregious mistakes” in trading, he also said for the first time that the bank had changed its model for measuring so-called value-at-risk in the CIO where the derivatives portfolio was managed.

The change made the CIO’s portfolio, which totaled about $375 billion, appear to be a lot safer than it actually was and gave traders more leeway to make risky bets. The rest of the bank’s divisions apparently kept to more conservative modeling.

The old model would have sounded alarms by showing that the CIO could lose $129 million, or more, in a day during the first quarter – a higher reading than during the financial crisis.

But the new model cut that figure almost in half, to $67 million, clouding the view inside and outside the bank of the danger it faced. That figure was lower than the $69 million reading at the end of the prior quarter.

So far, Dimon has not revealed exactly when the model was changed, or why.

Those questions now appear certain to be at the center of regulatory and shareholder inquiries into the losses, which are expected to grow. Some traders and analysts at other firms estimate the final loss tally could exceed $5 billion as the bank tries to unwind its positions. Dimon has said the losses could total $3 billion or more.

LAWSUITS ABOUT RISK

Investors have dumped JPMorgan‘s shares since the loss was announced, pushing them down more than 17 percent and erasing more than $27 billion of market value. Two shareholder lawsuits were filed against the company on Wednesday, accusing the bank and its management of taking excessive risk.

The SEC is investigating what happened at JPMorgan, the White House has confirmed. [ID:nL5E8GECMU] The FBI has also opened a preliminary investigation, according to agency director Robert Mueller. [ID:nL1E8GG9HX]

A JPMorgan spokesman declined to comment. Spokesmen for the SEC and FBI declined to comment.

“It is logical to expect that the SEC will look at this issue” of the disclosures, as well as why and how the new model was adopted, said Harvey Pitt, a former SEC chairman.

“Regulators are going to want to know if changes were made consistently with the obligation to operate safely and soundly,” said Pitt, who is currently CEO of Kalorama Partners, a business consulting firm.

An initial report on the bank’s results for the first quarter, made April 13, disclosed the $67 million figure, the reading under the new risk model. It did not say that there had been a change in models.

On May 10, as it explained the losses, the bank showed the $129 million risk reading from the old model. On a call with analysts that day, Dimon said the bank had tried the new model, and then reverted to the old one, which it had used for several years.

“There are constant changes and updates to models — always trying to get them better than they were before,” Dimon said in the May 10 conference call. “That is an ongoing procedure.”

That explanation, “does not pass the smell test,” said Mike Mayo, analyst at investment firm CLSA. “It is a red flag for them to change the model,” said Mayo, author of “Exile on Wall Street,” about the inner workings of big banks.

Banks sometimes refine their value-at-risk, or VaR, models but those commonplace changes do not by themselves produce such dramatically different results, said Christopher Finger, one of the founders of RiskMetrics Group, which pioneered VaR models and is now a unit of MSCI Inc.

The model JPMorgan put back in place shows “a huge, huge increase in risk,” Finger said.

Finding out how the company decided to change the model would reveal a lot about its internal controls and about how the traders apparently got the upper hand over risk managers, said Finger.

Risk controls on traders in the CIO were eased last year without Dimon knowing, the Wall Street Journal reported on Friday, citing unidentified sources.

Traditional value-at-risk models are not a perfect predictor — for example, they only estimate the possible losses for most days, losses could be even bigger on a few occasions. But even so, they are widely used as a metric by risk managers, traders, and investors.

Changes in such risk models usually require several layers of approval going up the management ladder, said a risk manager at a large financial company, who declined to be identified.

Mayo said it is important for investors to know who at JPMorgan made the decisions and exactly when, so they can gauge if the loss is the result of bigger problems at the bank.

“I have yet to hear an answer that makes a lot of sense,” he said. The lack of transparency makes him wonder: “What else is falling through the cracks?”

(Reporting by David Henry and Jed Horowitz in New York.; Editing By Alwyn Scott, Martin Howell and Kenneth Barry)

NEW YORK (Reuters) – Stocks fell on Friday, with the NYSE composite stock index turning negative for the year as Facebook Inc stumbled in its market debut and investors were cautious ahead of a G8 summit on the weekend expected to address Europe’s debt crisis.

The Dow Jones industrial average dropped 61.61 points, or 0.50 percent, to 12,380.88. The Standard & Poor’s 500 Index fell 6.90 points, or 0.53 percent, to 1,297.96. The Nasdaq Composite lost 20.81 points, or 0.74 percent, to 2,792.88.

(Reporting By Edward Krudy, editing by Dave Zimmerman)

SAN FRANCISCO (Reuters) – Facebook Inc shares rose less than expected on their first day of trade on Friday and huge order volume caused technical problems that marred the coming out party of the No. 1 online social network.

Its shares were up 8 percent in early afternoon trading on the Nasdaq, after opening 11 percent higher and then rapidly heading south to touch their initial public offering price of $38. The gains were below market forecasts of as much as a 50 percent jump.

“We have got some unhappy guys out there,” said Wayne Kaufman, chief market strategist at John Thomas Financial, a retail broker on Wall Street. “They were hoping for Facebook to be considerably better. I bet there are a lot of disappointed people in the market.”

Facebook, which has about 900 million users globally, priced its IPO at the top end of its target range, becoming the first U.S. company to go public with a valuation greater than $100 billion. If a greenshoe option to underwriters is exercised, Facebook will raise as much as $18.4 billion by selling an 18 percent stake, the second-biggest IPO in U.S. history after the one by Visa Inc.

Analysts blamed the poorer-than-expected first-day showing on the vast number of shares floated and market weakness. General Motors’ decision to pull paid-advertising from the social network, announced this week, also hurt.

After a delay in the opening print that drove up anxiety levels among traders and onlookers outside the Nasdaq, the closely watched stock began trading at $42.05, rose to as high as $45 and then rapidly retreated. The Nasdaq exchange said it was investigating an issue with execution of trades.

Facebook’s IPO had been heavily oversubscribed, particularly by retail investors, despite concerns about slowing growth in the last quarter, whether the company can make money from mobile advertising, and the immense control Chief Executive Mark Zuckerberg has over on the company.

Others warned that the IPO price, equivalent to over 100 times historical earnings versus Apple Inc’s 14 times and Google Inc’s 19 times, makes Facebook a risky bet.

EARLY FANFARE

For Facebook, Friday began with much fanfare. To rapturous applause from employees, Mark Zuckerberg — flanked by Chief Operating Officer Sheryl Sandberg and Nasdaq Chief Executive Robert Greifeld — rang the bell to kick off trading at the company’s Silicon Valley headquarters at 6:30 a.m. Pacific time.

The 28-year-old billionaire founder, wearing his trademark black hoodie, hugged and high-fived Sandberg and other employees in celebration after he pressed the remote button.

The area outside Facebook’s offices was packed with throngs of photographers, more than a dozen television trucks, and a TV news helicopter hovering overhead as the excitement reached fever pitch.

The fizzling of Facebook’s early gains put pressure on other social media stocks. Zynga, which depends on Facebook for much of its revenue, dived 13 percent before it was halted. LinkedIn Corp was off 3 percent at midday.

“When you see what’s happening with other social media stocks today, which are significantly down, as well as looking at Facebook trading flat, we think it has traded obviously at the high end,” said Destination Wealth Management CEO Michael Yoshikami.

“It’s a rich valuation, particularly given the advertising pressure they’re under now. Advertising revenue has grown significantly slower over the past few years, and that’s punctuated by GM’s decision to stop advertising on Facebook.”

“We’re not buyers at $38, particularly considering that most of their business is in mobile and they haven’t figured out how to make money yet.”

(Additional reporting by Edwin Chan in San Francisco, Yinka Adegoke, Ed Krudy and Olivia Oran in New York; Editing by Steve Orlofsky and Tiffany Wu)

NEW YORK/SAN FRANCISCO (Reuters) – Facebook Inc shares opened 11 percent higher on Friday, after the pioneering online social network raised as much as $18.4 billion in one of the biggest initial public offerings in U.S. history.

After a delay in the opening print that drove up anxiety levels among traders and onlookers outside the Nasdaq, the company’s closely watched stock began trading at $42.05, compared with an IPO price of $38.

To rapturous applause from employees, Facebook Chief Executive Mark Zuckerberg — flanked by Chief Operating Officer Sheryl Sandberg and Nasdaq Chief Executive Robert Greifeld — rang the bell to kick off trading at the company’s Silicon Valley headquarters at 6:30 a.m. Pacific time.

The 28-year-old billionaire founder hugged and high-fived Sandberg and other employees in celebration after he pressed the remote button.

The area outside Facebook’s offices at 1 Hacker Way was packed with throngs of photographers, more than 12 television trucks, and a TV news helicopter hovering overhead as the excitement reached fever pitch.

With a value of $104 billion, Facebook became the first American company to debut at over a $100 billion. It is larger than Starbucks Corp and Hewlett-Packard combined.

“A 15 to 20 percent pop is in the realm of possibility,” said Tim Loughran, a finance professor at the University of Notre Dame, before the start of trade.

“Given they already moved their IPO range up and increased the size, that’s bullish to begin with.”

Facebook priced its offering at $38 a share on Thursday, but the price could be higher when shares begin trading under the FB symbol on the Nasdaq at 11 a.m. Eastern time (1500 GMT).

Cameramen gathered around the Nasdaq building in New York’s Time Square early on Friday as press throngs joined tourists and workers in the area. One of the billboards in the area prominently displayed the Facebook logo.

On Twitter and in office elevators the morning talk was betting how much Facebook’s initial price would rise by the end of trading.

Some expect shares could rise 30 percent or more on Friday, despite ongoing concerns about Facebook’s long-term money-making potential. An average of Morningstar analyst estimates put the closing price for Facebook shares on Friday at $50.

The IPO, expected to mint more than a thousand paper millionaires at the company, has received wall-to-wall media coverage and sparked hopes of a boom in sales of everything from San Francisco Bay area real estate to automobiles.

Facebook employees marked the event with an all-night “hackathon” at the company’s Menlo Park, California, headquarters starting on Thursday evening, a tradition in which programmers work on side projects that sometimes turn into mainstream offerings.

The website, founded in a Harvard dorm room in 2004, has grown into the world’s dominant social network with 900 million users.

At $38 a share, Facebook would trade at more than 100 times historical earnings versus Apple Inc’s 14 times and Google Inc’s 19 times.

For all the high expectations surrounding Facebook, the company faces challenges maintaining its momentum.

Some investors worry the company has not yet figured out a way to make money from the growing number of users who access Facebook on mobile devices such as tablets and smartphones. Meanwhile, revenue growth from Facebook’s online advertising business, which accounts for the bulk of its revenue, has slowed in recent months.

General Motors said on Tuesday it would stop placing ads on Facebook, raising questions about whether display ads on the site are as effective as they are in traditional media.

(This story has been corrected to amend opening price to $42.05, not $43)

(Additional reporting By Edwin Chan in San Francisco and Yinka Adegoke in New York; Editing by Steve Orlofsky)

NEW YORK (Reuters) – U.S. stocks were little changed on Friday, with equities unchanged by the delayed market debut of Facebook .

Facebook rose 11 percent to $42 in early trading.

The Dow Jones industrial average <.dji> was down 7.34 points, or 0.06 percent, at 12,435.15. The Standard & Poor’s 500 Index <.spx> was up 0.64 points, or 0.05 percent, at 1,305.50. The Nasdaq Composite Index <.ixic> was down 5.14 points, or 0.18 percent, at 2,808.55.

(Reporting by Ryan Vlastelica; Editing by Dave Zimmerman)

NEW YORK (Reuters) – Stock index futures edged up on Friday but major indexes were setting up to close their worst week of the year, while Facebook‘s debut could help lift battered investor sentiment.

The S&P has fallen 6.7 percent so far in May, and while volatility is expected to continue, some analysts were forecasting a near-term rebound.

Investors are bracing for Facebook’s Wall Street debut after the world’s No. 1 online social network raised about $16 billion in one of the biggest initial public offerings in U.S. history. Facebook priced its offering at $38 a share on Thursday, and shares are expected to begin trading under the FB symbol on Nasdaq at around 11 a.m. EDT.

The large weekly decline in equities came amid uncertainty over a political crisis in Greece and whether that could trigger a default and possible exit from the euro zone.

Market participants were skittish even as a poll showed Greek voters are returning to the establishment parties that negotiated its bailout, offering some respite to European leaders who say a snap Greek election next month will decide whether it must quit the euro.

“Even good news is not enough to overcome the fear that there is going to be a dramatic slowdown in the world economy because of the European crisis,” said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

“Today, Facebook trading up would be a good start,” he said, adding that a decline below the IPO price “could be a big negative for the market.”

S&P 500 futures rose 7.7 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures rose 59 points, and Nasdaq 100 futures added 12 points.

The cost to insure Spanish government debt against default hit record highs Friday, a day after Moody’s cut its rating on Spanish banks en masse, heightening fears of contagion from the Greek political crisis.

Spanish government-run Bankia shares, up more than 20 percent on the day but still down 33 percent this month, led a rebound in Spanish banking stocks as traders closed short positions. U.S.-traded shares of Banco Santander and BBVA rose near 5 percent in light premarket trading.

U.S. stocks hit a four-month low on Thursday as another round of weak data undermined hopes for a U.S. economic recovery, and as rising Spanish bond yields increased investor anxiety over the European nation’s banks.

(Reporting by Rodrigo Campos. Editing by Bernadette Baum, Dave Zimmerman)

MADRID (Reuters) – Spanish bank bad loans rose in March to their highest in 18 years, figures from the Bank of Spain showed on Friday, underscoring the problems facing the government as it attempts to clean up the sector and get its economy back on track.

The Bank of Spain said bad loans rose to 8.37 percent of the banks’ outstanding loans, the highest since August 1994 and up from 8.3 percent in February, which was also revised higher.

The data came as Spain was set to name independent auditors to assess how much cash its banks are likely to need to rebuild their balance sheets.

Financial sources have said fund manager BlackRock and management consultancy Oliver Wyman would likely be named to conduct a deep audit of the sector, but a government source told Reuters a final decision had not been reached and BlackRock may have a conflict of interest.

An announcement on the auditors would come on Friday or Monday, several government sources said.

The Bank of Spain figures, released hours after a mass bank downgrade by credit ratings agency Moody’s, showed losses from loans made in Spain’s housing bubble are still rising.

Troubled banks, along with overspending in indebted regions, are the two biggest risks for Spain’s public finances. Investors believe Spain needs to aggressively address these two issues to avoid an Irish-style bailout.

Banks expect bad loans to continue to rise this year as the economy contracts and the jobless rate remains painfully high at almost one in four of the workforce, the highest in the EU.

Against that backdrop, analysts estimate bad loans could rise to well over 10 percent of loans.

“The challenge is the non-performing loans portfolio that sits on their books and the direction of that (level),” Johannes Wassenberg, managing director of banking at Moody’s, told Reuters on Friday. “The key is getting to the bottom of that, whether in a single entity or a consolidated basis.”

A more immediate worry is if savers start to withdraw deposits. A report that partly nationalized lender Bankia had lost more than 1 billion euros ($1.3 billion) in deposits sparked a 30 percent crash in its shares on Thursday, before denials of an exodus.

BORROWING COSTS

On the streets of Madrid, there are no signs of panic about savings, but some are wary and are checking with branch managers and friends and relatives to discuss their concerns.

“The banks in Spain aren’t in a good position to secure deposits and the accounts of Spaniards, and our government should have known that and taken the necessary measures so that this (the uncertainty over the banks) wouldn´t happen,” said Manuel, a Madrid resident who didn’t give his last name.

Spain’s borrowing costs hit euro-era highs this week, prompting the government to ask Europe for more backing.

Prime Minister Mariano Rajoy will press for the European Central Bank to step up its defence of the euro zone in a meeting on Sunday with German Chancellor Angela Merkel, on the sidelines of a NATO summit in Chicago, and at a lunch with French President Francois Hollande on Wednesday in Paris.

Spanish officials say Spain has done its job with reforms to make its economy more competitive, such as making it cheaper for companies to hire and fire, with measures to shore up the banking system, and with harsh spending cuts.

They say ECB bond buying is necessary to back up Spain’s efforts. Rajoy has pledged to continue with austerity measures even though they have aggravated the economic contraction.

There is skepticism the government’s estimates of losses are high enough, so the auditors will first stress-test the sector and then look at each bank individually.

The government has also hired Goldman Sachs to carry out an independent valuation of Bankia, the ailing bank taken over by the state last week, two sources said, one from the government, one from the financial sector.

REAL ESTATE LOSSES

Bankia’s financial hole may reach 8 billion euros ($10.2 billion), on top of the 10 billion it needs to set aside to cover potential losses on real estate assets, newspaper Expansion said.

Moody’s on Thursday downgraded 16 Spanish banks, citing the recession, real estate crisis and unemployment, and the government’s reduced ability to support troubled lenders. But the move had been expected and Spanish bank shares rose on Friday to trim losses at the end of a grim week.

By 0940 GMT shares in Santander were up 2 percent and BBVA added 3 percent, outperforming a 0.4 percent fall in the European bank sector.

Bankia shares jumped 18 percent, but have still tumbled 31 percent in the last two weeks. Santander and BBVA have both dropped 7 percent this week as the crisis has rattled investors in the bigger, stronger lenders too.

The cost of insuring the banks against default has also risen. By 1000 GMT Santander’s five-year credit default swaps (CDS) were up 9 basis points at 452.25 bp and BBVA rose 12.5 bp to 499 bp. This means it costs just under $500,000 annually to buy $10 million of protection against a BBVA default using a five-year CDS contract.

Insurance costs have risen across the sector this week, with the iTraxx Senior Financial index breaching 300 bp on Thursday for the first time since December.

Bankia – due to present a restructuring plan next week – has said it would need 4.7 billion euros in capital to comply with the last banking reform.

The government last week forecast banks would need to find about 35 billion euros more to cover potential losses, marking its fourth attempt to deal with a 2008 property market crash.

($1 = 0.7869 euros)

(Additional reporting by Paul Day and Catherine Macdonald in Madrid and Steve Slater and Jean-Marc Poilpre in London; Editing by Fiona Ortiz and David Holmes)

U.S. stock index futures pointed to a slightly higher open on Wall Street on Friday, with futures for the S&P 500 and the Dow Jones up 0.2 percent and Nasdaq futures up 0.3 percent at 4:41 a.m. EDT.

Japan’s Nikkei average dived 3 percent on Friday to log a seventh straight week of losses, its longest such run since the third quarter of 2001, as investors sold stocks and other risky assets on concerns over slowing global growth and a deepening euro zone crisis.

Incoming French President Francois Hollande meets with U.S. President Barack Obama ahead of a meeting of G8 leaders this weekend and a NATO summit that immediately follows. Analysts and officials say there is little doubt the U.S. president will use the opportunity to try to build rapport and stress the importance of European cohesion.

Facebook Inc is set to raise up to $18.4 billion in its IPO and become the first U.S. company to be worth more than $100 billion at its debut, as investors bet on a big pop in the stock when it begins trading on the Nasdaq on Friday.

Strong athletic footwear sales are expected to boost earnings for Foot Locker , whose results outpaced Wall Street estimates throughout 2011. Financial performance in Europe will be a point of focus, considering the macro-headwinds in the continent, although its performance in the U.S. is expected to be solid. Clothier AnnTaylor also reports quarterly results.

GE General Electric aims to double the number of joint ventures it has in China from the current 28 in roughly five years, its vice-chairman said on Friday.

The company is also working with the government of Myanmar on possible infrastructure projects, its vice-chairman said on Friday, a day after the United States said it had suspended sanctions barring U.S. investment in the poor Southeast Asian country.

U.S. stocks hit a four-month low on Thursday as rising Spanish bond yields increased investor anxiety over that country’s banks and another round of weak data undermined hopes for U.S. economic recovery.

The Dow Jones industrial average dropped 156.06 points, or 1.24 percent, to 12,442.49. The Standard & Poor’s 500 Index fell 19.94 points, or 1.51 percent, to 1,304.86. The Nasdaq Composite Index lost 60.35 points, or 2.10 percent, to 2,813.69.

(Reporting By Francesco Canepa)