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NEW YORK – Analysts fear conditions on Wall Street could worsen before they improve, as anger morphs into uncertainty about its business practices and prospects.
Moves to rein in big banks and talk of blocking the reappointment of Federal Reserve Board Chairman Ben Bernanke torpedoed confidence in the stock market last week, sending share prices into their steepest decline in nearly a year.
The mood darkened after President Obama and the Democratic Party suffered an upset in the Massachusetts Senate race. That loss, attributed to concerns that the administration wasn’t focused sharply enough on the country’s economic woes, came as many of the financial firms bailed out by taxpayers in the past two years reported massive profits and announced a round of big bonuses.
By Friday’s closing, the Dow Jones industrial average had plunged 4 percent over four days.
There were some signs Saturday of Washington working to calm Wall Street. Senate Banking Committee Chairman Christopher Dodd, D-Conn., and Republican member Judd Gregg of New Hampshire issued a joint statement predicting that Bernanke would be confirmed.
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 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 thinks a period of slower but steady growth is ahead.
“The only thing that could ruin it is Washington,” Hennessy said.
A White House official signaled Saturday that the administration was more focused on the economy’s long-term gains, such as adding jobs, than on market swings.
“The policies that work out best over time are those that strengthen economic fundamentals, not try to influence day-to-day market movements,” said Lawrence Summers, the president’s top economic adviser.
Bernanke’s term expires Jan. 31, and if he is not reappointed, “who are they going to put in Bernanke’s place? That is a huge uncertainty, and uncertainty right now is a big negative,” said Tom Sowanick, chief investment officer at Clearbrook Financial in Princeton, N.J.
At the same time, some in the industry are questioning Treasury Secretary Timothy Geithner’s standing in the administration after Obama on Thursday announced new restrictions on banks. Paul Volcker, an economic adviser, had championed the proposal, which seeks to limit activities at commercial banks such as proprietary trading, which are investments that are not intended to benefit customers.
Also driving concern is whether the recent proposals are just the opening salvo of an anti-business campaign from Washington. In a speech Thursday, Obama signaled that he was ready for a showdown with financial lobbyists as he proposed legislation to prohibit large banks from engaging in proprietary trading and owning hedge funds and private-equity groups.
“It only took two days after the special election” for the White House to announce a new proposal, said Sean Ryan, a banking analyst for Wisco Research. “God knows what we’re in for between now and November.”
