Bank stocks and the broader market sank Tuesday as investors questioned whether the Treasury Department's plan for the second half of its Troubled Asset Relief Program would be enough to fix the financial sector.
The KBW Bank Index fell 13.85%, the Dow Jones industrial average fell 4.62%, and the Standard & Poor's 500 fell 4.91%.
Treasury Secretary Timothy Geithner said Tuesday morning that the federal government would spend about $100 billion of the remaining $350 billion of bailout funds on injecting more capital into banking companies. To be eligible, they would be subjected to a new stress test to determine if they would be healthy enough to lend if they received additional government funds. Mr. Geithner did not provide details on how that test would be applied.
He also discussed the formation of a "bad bank" to absorb toxic assets with the help of private capital sources, but he gave no details on how those assets would be priced.
In addition, the Treasury Department would use some of the remaining Tarp funds on expanding the Federal Reserve Board's Term Asset-Backed Securities Loan Facility, whose price could reach $1 trillion.
Gary Townsend, the chief executive at Hill-Townsend Capital LLC, said investors were left wondering whether the Treasury's plans would really jump-start the credit markets.
"There were few details, and Geithner's presentation was poor," he said. "On something this important, one would think the Treasury would have its position fully formed."
Bank stocks, including large-cap firms, fell across the board. JPMorgan Chase & Co. fell 9.8%, Bank of America Corp. fell 19.3%, Citigroup Inc. fell 15.2%, Wells Fargo & Co. fell 14.2%, and U.S. Bancorp fell 13.8%.
Among regionals, Huntington Bancshares Inc. fell 24.9%, KeyCorp fell 26.6%, SunTrust Banks Inc. fell 27.2%, Regions Financial Corp. fell 30.2%, and Zions Bancorp. fell 19.5%.
Colonial BancGroup Inc. fell 23.1%. Traders said the decline was in large part a result of the market's broader woes, but the $26 billion-asset Montgomery, Ala., company was hit with a shareholder lawsuit Monday claiming it misled investors about strings attached to its receipt of Treasury funds.
Klafter Olsen & Lesser LLP of Washington filed the suit in the U.S. District Court for the Middle District of Alabama for shareholders who bought Colonial's stock between Dec. 2 and Jan. 27. The suit claims that Colonial's Dec. 2 announcement of preliminary approval to sell $550 million of preferred stock to the government should have disclosed that the company would need to raise $300 million on its own before receiving the funds. It made the disclosure of special conditions Jan. 27, when it announced a fourth-quarter loss of $825 million.
The day the preliminary approval was announced, Colonial's stock rose 54%, to $3.08 a share. The day after the loss was reported, the shares fell 46.2%, to 85 cents.