Markets Plummet On Jobs Report, U.S. Lawsuit Against Banks

September 2, 2011

Markets tumbled more than 2 percent Friday, wiping out gains made earlier in the week, after the release of a lackluster jobs report and the news that the U.S. government was suing more than a dozen large banks over toxic mortgage investments.

Friday’s downturn extended a two-day slide and harkened back to Wall Street’s wild swings in early August, when stocks would rise and fall more than 400 points in a single day. Markets had appeared to stabilize last week, but yesterday’s drop indicated that investors are still nervous, ready to pull the trigger and sell at the first sign of bad news.

The blue-chip Dow Jones industrial average ended the day down 253 points, or 2.2 percent. The S&P 500, a broader measure of stocks, fell 30 points, or 2.5 percent, while the tech-heavy Nasdaq lost 65 points, or about 2.5 percent.

The worries have centered around the weak U.S. economy, particularly after the Labor Department announced Friday morning that payrolls had added zero net jobs in August, the poorest showing since September 2010.

“We’re not in a recession yet, but we’re right there at the edge,” said Mark Zandi, chief economist at Moody’s Analytics. “Markets aren’t discounting a recession just yet, but the jitters reflect just how precarious a situation we’re in.”

Bank stocks, in particular, took a hit on news that the Federal Housing Finance Agency was preparing to sue more than a dozen big banks in order to recoup billions of dollars in losses from mortgage-backed securities that had been sold to taxpayer-backed Fannie Mae and Freddie Mac and then went sour after the housing collapse in 2008.

The FHFA officially announced its lawsuit after the 4 p.m. close in New York, naming 17 banks, including Bank of America, Citigroup, JPMorgan Chase and Goldman Sachs over $196 billion in mortgage securities.

Prior to close, Bank of America’s stock had dropped 8.3 percent, while JPMorgan Chase, Citigroup and Wells Fargo & Co. had all fallen more than 4 percent. Overall, the 24-company KBW Bank Index slid 4.5 percent.

Many of the largest financial institutions were already in trouble prior to the unveiling of the FHFA suit. Goldman Sachs had fallen 3.5 percent after regulators announced an enforcement action against a former subsidiary of the bank over its foreclosure practices. And shares of Bank of America had dropped as investors worried whether the nation’s largest lender could weather another downturn in the economy. Analysts noted that the lawsuit was likely to put the financial sector in a further bind.

Under a recently established international standard, “banks are already undercapitalized,” said Richard Bove, an analyst with Rochdale Securities. “Since the banks can’t sell stock in this market, they have only one recourse, to shrink their balance sheets pretty dramatically. That means getting rid of loans and firing people.”

Oil trading also reflected weaker economic expectations, sliding $2.28 to end at $86.65 per barrel. The price of gold, meanwhile, soared to its highest level in nearly two weeks, to $1,881.60 per ounce, as investors sought safer havens.

One caveat to the pre-Labor Day slide is that trading volume remained relatively light this week, suggesting that many investors were still on vacation.

The recent dip could put pressure on the Federal Reserve as it considers further measures to stabilize the economy. Stocks rallied toward the end of the month after a speech by Fed Chairman Ben Bernanke on Aug. 26, when he noted that conditions had not yet deteriorated enough to warrant another round of stimulus. But, as Friday’s sell-off showed, even a seemingly tranquil week for the market can be easily disrupted.

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