Political push-back stalls stock market rally on Wall Street

By Renae Merle and Tomoeh Murakami Tse
Washington Post Staff Writer
Sunday, January 24, 2010

NEW YORK -- Washington spent months nursing the financial system back to health after the 2008 economic crisis, stabilizing then reviving battered markets and ultimately restoring trillions of dollars in investor losses. Wall Street's political fortunes have not fared as well.

Now, an aggressive stance against the bankers, financiers and even government officials popularly blamed for causing the crisis is gaining political momentum, and there are signs it is eroding the very financial stability the government championed.

Moves to rein in the country's biggest banks and talk of blocking the reappointment of Federal Reserve Board Chairman Ben S. Bernanke torpedoed confidence in the stock market last week, sending share prices into their steepest decline in nearly a year. Analysts fear conditions could worsen before they improve, as anger at Wall Street morphs into uncertainty about its business practices and prospects.

The anti-Wall Street mood darkened after President Obama's Democratic Party suffered a stunning upset in the Massachusetts Senate race. That loss, attributed to concerns that the administration wasn't focused sharply enough on the country's continuing economic woes, came as many of the financial firms bailed out by taxpayers in the past two years reported massive profits and announced another round of big bonuses.

By Friday's closing bell on the stock exchange floor, the Dow Jones industrial average had plunged 4 percent over four days. The Chicago Board Options Exchange's Volatility Index, which measures the degree to which investors expect stocks to swing and is often called the "fear gauge," had shot up 50 percent for the week. And in a move reminiscent of the depths of the financial crisis, investors piled into government bonds, seeking cover from the turbulence.

There were signs Saturday of Washington working to calm Wall Street. Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and Republican member Judd Gregg (N.H.) issued a joint statement predicting that Bernanke would be confirmed.

"In the last few days there have been a flurry of media reports on Chairman Bernanke's confirmation prospects, highlighting a very vocal opposition," the statement said. "Chairman Bernanke has done an excellent job responding to one of the most significant financial crises our country has ever encountered."

In calls to key senators, Obama also was reassured that the Fed chairman is on track for confirmation, according to a senior administration official.

Reassured by government steps to stabilize the markets, including moves to provide trillions of dollars in backstops and direct government investment in some troubled companies, institutional investors helped the Standard & Poor's 500-stock index climb more than 60 percent since hitting a March low. Economic concerns remain -- joblessness above 10 percent worries some forecasters -- but until Washington began publicly mulling over new taxes on banks, limits on their businesses and restrictions on compensation, the markets were largely stable, investors say.

"The president is coming out every other day with a new plan -- now he's going to bully banks," said Neil Hennessy, who runs an investment firm that bears his name and who thinks a period of slower but steady growth is ahead.

"The only thing that could ruin it is Washington," Hennessy said. "And a big part of it is we're getting no clarity out of our Senate, our Congress or our president. Businesses like myself, why would I hire anybody? Because I don't know what it's going to cost me anymore, in health care, or whatever."

A White House official signaled Saturday that it was more focused on the economy's long-term gains, such as adding jobs, than on market swings.

CONTINUED     1        >

© 2010 The Washington Post Company