Financial stocks lead indexes down on announcement of big-bank plan

By Renae Merle
Washington Post Staff Writer
Friday, January 22, 2010

U.S. stocks tumbled Thursday amid concerns that a White House plan to restrict the growth of the nation's largest banks could hurt their profits, sending Wall Street to its biggest one-day loss in three months.

Nearly every stock in the Dow Jones industrial average fell, but banking stocks took the biggest hits. Shares of Bank of America and J.P. Morgan Chase fell more than 6 percent, while Goldman Sachs's stock fell 4 percent even after the firm reported a profit of more than $13 billion for 2009.

The Dow, an index of 30 blue-chip stocks, finished the day down 2 percent, or 213.27 points, at 10,389.88. The broader Standard & Poor's 500-stock index fell 1.9 percent, or 21.56 points, to 1116.48, while the tech-heavy Nasdaq composite index fell 1.1 percent, or 25.55 points, to 2265.70. The sell-off continued in Asian markets in early trading Friday, with Japan's Nikkei 225 down nearly 3 percent during the morning session.

Crude oil prices fell an additional 2 percent, bringing down energy stocks. And investors piled into government bonds as an escape from the market's volatility. Investors buying one-month Treasury bills were making virtually nothing on the deal, while the yield on a 10-year note fell to 3.59 percent Thursday, compared with about 3.8 percent at the beginning of the year. The lower yield means investors are making less.

The proposal announced by President Obama on Thursday took aim at the country's largest banks, proposing limits to the kind of high-risk investments they can make and preventing them from getting much larger. The move follows administration plans unveiled earlier this month for a new tax on the largest banks to recoup the cost of federal bailout programs.

Investors are concerned not only about the recent proposals, which could curb the industry's profits, but also about what could be coming later, analysts said. "There will probably be more onerous things proposed in 2010. From the perspective of the largest banks, you have to look at today as one step in what can be a long road," said Sean J. Ryan, a bank analyst for Wisconsin-based Wisco Research.

While large banks lagged, regional banks flourished. Fifth Third Bancorp climbed 6 percent, while SunTrust gained nearly 5 percent. "Regional banks are not in the cross hairs of the administration. This is a free pass for them," said James Cox, managing partner at Harris Financial Group in Richmond.

Adding to investors' worries were more tepid economic data. The number of workers filing new claims for jobless benefits unexpectedly rose by 36,000, to 482,000, last week, according to the Labor Department. Analysts had expected filings to fall, but the increase probably reflects a backlog built up during the holidays, analysts said. Meanwhile, the Philadelphia Federal Reserve reported that its index of regional manufacturing conditions fell to 15.2 in January from 22.5 in December.

"The general activity index weakened this month, indicating that the expansion in manufacturing activity has slowed," Yasmine Kamaruddin, a Wells Fargo economic analyst, wrote in a research note.

Both reports stoked concerns about the pace of the economic recovery. While there have been some signs of improvement, a robust recovery is unlikely until companies start adding jobs, they said. That, combined with recent signs that China is taking steps to clamp down on lending in an effort to contain inflation and stave off an asset bubble, has some economists concerned.

"All the forward-looking indicators tell us things are getting better" with the economy, Cox said. "The thing that has everybody vexed is, why isn't it improving faster?"

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