President Barack Obama's plan to change the way big banks make their money plunged the stock market back into the fear and uncertainty that marked the financial crisis.
Obama said Thursday he would ask Congress for limits on how big banks can become and to end some of the risky trades financial companies use to supercharge their earnings. Investors sent stocks tumbling as they worried the plan would destabilize Wall Street's 10-month rally.
Big bank stocks skidded, yanking the Dow Jones industrial average down 213 points and erasing its gains for 2010. Over the past two days, the Dow dropped 336 points, or 3.1 percent, its worst slump since June. Wednesday's drop came on more global concerns, that China's economy would slow and hurt other countries as well.
Todd Leone, managing director of equity trading at Cowen & Co. in New York said some rules need to be changed after the financial crisis of the past two years but that the government was reaching too far.
"They kind of stabbed themselves and there should be some limitations on them," Leone said of large financial companies. "But you have to let these guys run their businesses. I think they're too involved and I think that's why people are upset."
The market's reaction, if it's sustained, will put Obama in a difficult position. Americans may be angry at Wall Street and bankers with huge paychecks, but they're likely to be more upset if Obama's tough talk leads to a huge pullback in the stock market and their 401(k) accounts, which are still recovering from the financial crisis. Obama must straddle a line of trying to win populist points without sacrificing one of the biggest rallies in history.
Still, investors are worried, although they have known changes were coming to the nation's banking system. The plan to reshape the way companies do business went beyond what some traders expected, and it raised concerns that profits would suffer. A return of hefty earnings at some major financial companies was one of the engines of a 65 percent jump in the benchmark Standard & Poor's 500 index since March.
Traders fled Thursday from the banks with the most to lose. Bank of America, Citigroup Inc. and JPMorgan Chase & Co. each lost more than 5 percent.
Another concern is that the skirmishes between Washington and Wall Street could result in greater government control over banks and in turn, higher costs for the companies. Last week, Obama proposed a 10-year, $90 billion tax on the largest financial institutions to cover any shortfall in the $700 billion fund to bail out struggling financial companies.
The latest proposal aims to clamp down on speculation by commercial banks and keep them from getting so big that a collapse would jeopardize the financial system. That could force the break up of some the nation's biggest banks.
The Dow fell 213.27, or 2 percent, to 10,389.88, its biggest point and percentage drop since Oct. 30. Its two-day loss is the worst percentage loss since June 16. The drop extended a spate of erratic trading that has seen prices reverse several times since last week. The Dow also has logged four straight triple-digit moves for the first time since May.
It is also down 0.4 percent for 2010.
The broader Standard & Poor's 500 index fell 21.56, or 1.9 percent, to 1,116.48. The Nasdaq composite index fell 25.55, or 1.1 percent, to 2,265.70.
The proposals capitalize on the public's distrust of the bankers Obama has called "fat cats" for their role in the financial system's near-collapse in 2008. And with unemployment at 10 percent, bankers who are blamed for contributing to the recession are suspect.
On Thursday, Goldman Sachs Group Inc. said its profit came to a record $4.79 billion for the final three months of 2009 and that it paid employees $16.2 billion in salaries and bonuses for 2009. That was up 47 percent from 2008 but less than many analysts had predicted. The company also said it would give $500 million to the bank's charity arm.
Goldman Sachs said trading operations, including the type of trades Obama wants to restrict, brought in about 10 percent of the company's annual revenue.
Risky bets on investments including mortgage-backed securities contributed heavily to the near-collapse of the financial system in 2008, including the demise of investment firms Bears Stearns Cos. and Lehman Brothers Holdings Inc.
Another test for the market could come Friday. Google Inc. posted a fivefold jump in its fourth-quarter profit after the closing bell on double-digit revenue growth, but the results fell short of expectations. The stock fell $25.98, or 4.4 percent, to $557 in after-hours electronic trading after edging up 0.4 percent in regular trading.
Concerns about the future of the banking system and stocks helped drive up the market barometer known as the fear index. The Chicago Board Options Exchange's Volatility Index jumped 19.2 percent. A rise in the VIX, which is known as the market's fear index, signals that investors expect bigger swings in stocks.
Bank of America fell $1.02, or 6.2 percent, to $15.47, while Citigroup slid 19 cents, or 5.5 percent, to $3.27. JPMorgan fell $2.86, or 6.6 percent, to $40.54.
Bond prices jumped as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.59 percent from 3.65 percent late Wednesday.
The dollar rose against other major currencies, while gold fell. A rise in the dollar hurt commodity prices, which become more expensive for foreign buyers when the dollar strengthens. Crude oil fell $1.66 to $76.08 per barrel on the New York Mercantile Exchange.
The Russell 2000 index of smaller companies fell 11.25, or 1.8 percent, to 628.36.
Four stocks fell for every one that rose on the New York Stock Exchange, where consolidated volume came to a heavy 6.95 billion shares compared with 4.76 billion Wednesday.
Britain's FTSE 100 fell 1.6 percent, Germany's DAX index lost 1.8 percent, and France's CAC-40 fell 1.7 percent. Japan's Nikkei stock average rose 1.2 percent.