US markets plummet as banks falter and world slump deepens

The Dow Jones Industrial Average closed 4 percent lower, losing 332 points and falling below the 8,000 mark to 7,949. Also sharply down were the Standard & Poor's 500 Index (-5.3 percent) and the Nasdaq Composite Index (-5.8 percent). The Dow and S&P are now at two-month lows, largely erasing the rebound that followed the November presidential election, which saw the markets anticipate an Obama administration stimulus package. "Optimism that government spending would revive the economy [has] evaporated," Bloomberg News reported.

The financial sector took the biggest hit yesterday, with the S&P 500 Financials Index closing down 17 percent to its lowest level in 13 years.

Bank of America stocks closed 29 percent lower, Wells Fargo lost 24 percent, JPMorgan Chase fell 21 percent, and Citigroup declined 20 percent. Boston-based bank State Street, the world's largest institutional money manager, plummeted 56 percent after it announced $6.3 billion of unrealized losses in its investment portfolio, shocking financial analysts who had regarded State Street's financial operations as among the safest in the market.

Stocks in British-based banks also plunged as they announced massive losses and the government unveiled a new bailout package. (See "British government mounts new bank bailout amid warnings of economic collapse") The New York-listed shares of Royal Bank of Scotland fell by 69 percent, Barclays was down 42 percent, and HSBC Holdings lost 15 percent of its value.

Underlying the latest plunge of US and European banking stocks is the growing awareness that none of the multibillion-dollar bailout packages has resolved the underlying crisis of the financial sector that was first triggered by the collapse of the American subprime mortgage market. New York University Professor Nouriel Roubini yesterday estimated that US financial losses may total $3.6 trillion. "If that is true, it means the US banking system is effectively insolvent because it starts with capital of $1.4 trillion," he said. "This is a systemic banking crisis."

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http://wsws.org/articles/2009/jan2009/econ-j21.shtml