- The Washington Times - Tuesday, January 20, 2009

UPDATED:

Wall Street dropped sharply Tuesday, the price of bank shares plummeting because of renewed concern over rising losses, casting a long shadow over Main Street’s excitement for the new presidency of Barack Obama.

Two of the major indexes lost more than 5 percent and the Nasdaq fell below 1,500.

At the close of a stormy Inauguration Day session, the Dow Jones Industrial Average plunged 332.13, or 4.01 percent, to 7949.09 in its worst day since Dec. 1. The tech-heavy Nasdaq plummeted 88.47, or 5.78 percent, to 1440.86. The broader Standard & Poor’s 500 sank 44.90, or 5.28 percent, to 805.22.

The steep drop in the markets served as a bitter reminder of the domestic turmoil that awaits Mr. Obama when he gets down to business in the White House Wednesday. For one thing, the banking sector seems unable to find stability despite billions of dollars in bailout money sent its way from the U.S. Treasury.

Another $350 billion of the original $700 billion congressional authorization is standing by.

The catalyst for the free fall among bank stocks Tuesday was a report by State Street Corp., the world’s biggest money manager for institutions, that its earnings for the last quarter of 2008 nosedived by 71 percent. The company lost nearly half the value of its shares.

That came on the heels of an announcement Monday that the Royal Bank of Scotland lost $41.3 billion in the fourth quarter of last year, the biggest loss in history for a British corporation. There was little doubt that the severe problems affecting banks were linked worldwide.

On Wall Street Tuesday, shares of troubled Bank of America dropped more than 29 percent, JPMorgan Chase & Co. was off by more than 20 percent, shares of Wells Fargo sank by nearly 24 percent and Citigroup’s stock slid by more than 17 percent.

Citigroup announced after the markets closed that it was cutting its dividend from 16 cents a share to a penny.

Much of the problem appeared to be the declining value of assets held by the banks, most of which are in securities that are based on mortgages and credit card and auto loans. Consumers have been defaulting on those loans in an economy in which 2.6 million people lost their jobs last year, with worse expected.

Frederick Lane, chairman and CEO of Lane Berry & Co., an investment banking firm in Boston, told CNBC that “radical” steps must be taken to instill confidence in the economy and that the banks must “get rid of these assets that nobody wants to buy.”

Commodities also fell as the price of a barrel of oil rose by more than $2 to close at $38.74 on the New York Mercantile Exchange.

In a bright spot, computer maker IBM announced after the close that it’s earnings per share for the final three months of 2008 were $3.28 a share, far beyond analysts’ expectations of $3.03 a share.

Problems in the U.S. financial sector, chiefly with giants Bank of America and Citigroup, have been a drag on the markets generally for more than a week because of concerns that some banks will not have enough capital to see them through the worsening 13-month recession.

In Britain, the Financial Times newspaper reported that Bank of America might cut 4,000 jobs, most of them in New York, as it consolidates its purchase of Merrill Lynch, the giant brokerage house. The bank said in December that it planned to reduce its workforce by 35,000 people.

Britain’s decision Monday to embark on a second round of bailouts following the $55 billion it provided to banks in October ignited concern that it would nationalize the Royal Bank of Scotland because of its huge losses. The British government has increased its stake in that bank to nearly 70 percent.


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