NEW YORK—President Barack Obama’s new proposal calling for tighter restrictions on how U.S. banks can use their capital sent the stock market reeling again on Friday afternoon.
The Dow Jones Industrial Average dropped for a third straight session on Friday, down 217 points, or 2.1 percent. The S&P 500 slid 25 points, or 2.2 percent. The Nasdaq also lost 2.7 percent.
On the week, the Dow dropped 4.1 percent, its worst performance since the week ended Mar. 6, 2009, and the S&P lost 3.9 percent, the biggest one-day decline since the week ending Oct. 30, 2008.
“We’ve had a wonderful run up in stocks and clearly people have been looking for a reason to take some money off the table,” Ram Kolluri of ICICI Group said in a CNNMoney interview. “This week, they found some reasons.”
A main reason was President Obama’s new plan to restrict how banks can use their deposits. In a throwback to the Glass-Steagall Act—repealed during the Clinton administration—Obama will limit the ability of banks to make high-risk trades using customer deposits and disallowing commercial banks from investing in hedge funds.
The push is part of Obama’s agenda to regulate the financial services industry and his campaign promise to rein in risky trading practices by Wall Street banks. The measure, if approved by Congress, forces any organization that contains a bank to not “own, invest, or sponsor” a hedge fund or private equity fund. Also, the legislation will prohibit such banks from engaging in proprietary trading, or trading in securities for its own profit.
“My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small businesses, cannot keep credit card rates low,” Obama said in a public address last week.
Obama’s proposal had been lobbied for by former Federal Reserve Chairman Paul Volcker for years, and strikes a populist tone. But few can deny the public’s anger at the big banks. Take Bank of America Corp. for example. Bank of America has an investment bank as well as a retail commercial bank. As long as it meets the minimum capital requirements set forth by federal regulators, it can take its customers’ deposits and make large bets by buying or selling securities.
The new rules would disable such operations at bank holding companies. And it promises to hit hard the nation’s biggest banks, namely Goldman, Bank of America Corp., and Citigroup Inc. Shares of Goldman declined 4.2 percent on Friday, while shares of Bank of America fell 3.7 percent.
Google Misses View
Last week’s stock market decline was also fueled by weak fourth-quarter earnings from several technology titans, one of which was Google Inc.
Google posted a healthy 17.5 percent gain in quarterly revenues, but its $2 billion in profits was just shy of analyst estimates. Google shares dropped 5.7 percent on the Nasdaq exchange on Friday.
The company’s results and subsequent drop in share price was mostly due to analysts’ overly optimistic expectations from the company, as opposed to any real weakness in Google’s business.
“Given that the global economy is still in the early days of recovery, this was an extraordinary end to the year,” CEO Eric Schmidt said in a statement.
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