March 24 (Bloomberg) -- U.S. stocks fell as the nation’s top two banking officials called for stronger regulation of financial firms and Nobel Prize-winning economist Paul Krugman said the government will have to seize major lenders.
Citigroup Inc. and Bank of America Corp. retreated after the shares jumped more than 19 percent yesterday on the Treasury’s plan to purge toxic assets from banks. Southern Co. led a gauge of utilities to a 2.2 percent drop amid concern the U.S. will levy fees on fossil-fueled power plants. Walt Disney Co. slumped 3.2 percent following a downgrade by Goldman Sachs Group Inc., which said the stock is expensive.
The Standard & Poor’s 500 Index lost 2 percent to 806.24 a day after its fourth-biggest rally since the 1930s. The Dow Jones Industrial Average slid 115.57 points, or 1.5 percent, to 7,660.29 and the Nasdaq Composite Index fell 2.5 percent. Four stocks dropped for each that rose on the New York Stock Exchange. Thirty-year Treasury bonds gained, snapping a three- day drop.
“When you’re buying equities, you’re buying a stream of earnings and current earnings are in freefall,” said Douglas Cliggott, the Greenwich, Connecticut-based manager of the $81 million Dover Long/Short Sector Fund, which beat 97 percent of its peers last year. “We haven’t hit bottom yet.”
New Powers
The S&P 500 jumped 7.1 percent yesterday, extending its rebound from a 12-year low on March 9 to 22 percent, on speculation the White House plan to finance purchases of toxic assets will spur growth. Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy Geithner called today for new powers to take over and dismantle failing financial firms after the troubled rescue of American International Group Inc.
“AIG highlights the urgent need for new resolution procedures,” Bernanke said in testimony to Congress today.
The government spent $182.5 billion in rescuing AIG from losses tied to the housing market collapse. The New York-based insurer then spurred outrage after paying $165 million in bonuses to employees of the division that triggered the bailout with losses on credit-default swaps.
Citigroup lost 4.2 percent to $3. Wells Fargo & Co. declined 11 percent to $15.50. An index of S&P 500 financial stocks dropped 6.5 percent for the steepest tumble among 10 industries. The measure is down 28 percent this year even after rallying 58 percent from March 6 through yesterday.
Banks extended declines after Krugman said in an interview with Bloomberg Television that the financial crisis will force the government to take over big banks. He also predicted the U.S. economy won’t stabilize until late this year after shrinking 6.2 percent last quarter, the most since 1982.
“In the end, we’ll come to it,” Krugman said, referring to nationalizing banks. “You guarantee the liabilities of everybody but seize the big ones.”
Investors should sell bank stocks because the Treasury’s plan won’t stop profits from dropping, according to Richard Bernstein, Bank of America’s chief U.S. quantitative strategist who is leaving the bank in mid-April to start his own money management firm. Analysts project profit at financial companies in the S&P 500 will decline 33 percent this quarter and 34 percent in the next, according to estimates compiled by Bloomberg.
‘Systemic Risks’
Bank of America slid 7.4 percent to $7.22 after surging 26 percent yesterday. A company spokeswoman said David Rosenberg, the firm’s chief North American economist, is also leaving. He will join Gluskin Sheff & Associates in Toronto, according to a person familiar with the decision.
Utility stocks slid after U.S. Representative Rick Boucher introduced legislation to tax fossil-fueled power plants and create a $1 billion annual fund to support projects that capture and store carbon dioxide.
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