Bank stocks fell Wednesday after the Treasury Department announced it would not use the bailout program for its originally stated purpose of buying financial companies' distressed assets.
The KBW Bank Index fluctuated in the early morning, then fell steadily and closed down 6.33%. The broader markets reacted similarly to the news. The Dow Jones industrial average fell 4.73% and the Standard & Poor's fell 5.19%.
Treasury Secretary Henry Paulson said that buying troubled assets was not the most "effective way" to use the $700 billion of government funds that Congress approved last month. Instead, the Treasury will continue to inject capital into banks and possibly other industries.
Mr. Paulson also said the Treasury and the Federal Reserve Board are exploring the idea of developing a liquidity facility for triple-A-rated asset-backed securities.
Richard Bookbinder, a managing member at Bookbinder Capital Management LLC, said in an interview Wednesday said that the Treasury's continued investment in banks should be viewed as a positive — banks will be able to use the capital to restructure problem loans and make new loans, and troubled banks will be taken out of the system.
Mr. Bookbinder said economic fears were the main reason bank stocks fell Wednesday.
"There's uncertainty about the depth and severity of the economy, continued weakness in residential housing and commercial activity, and uncertainty over the outlook for the consumer having a bright, rosy Christmas season. I don't think we're going to get it," Mr. Bookbinder said. "As a result, nobody wants to own anything, and that's why there's continued selling pressure."
Fifth Third Bancorp fell 9.1%. The Cincinnati company said Wednesday that it has hired Ross J. Kari, a former Safeco Corp. executive, as its chief financial officer, ending a five-month search. Mr. Kari, who had been Safeco's CFO from 2006 until September, is expected to start at Fifth Third on Nov. 17.
Christopher G. Marshall resigned as Fifth Third's CFO in May. Daniel T. Poston, Fifth Third's controller, has held the post on an interim basis.
Morgan Stanley fell 15.2%. The New York company said it plans to layoff 10% of its institutional securities professionals, on top of layoffs of about another 10% of its work force so far this year.
Morgan Stanley also said that it will enter retail banking. The firm, which became a bank holding company in September, plans to hire world-class talent in the retail sector and introduce new products. Morgan Stanley will also use its exiting 450 branches and 8,500 financial advisers to market retail products.
Frontier Financial Corp. in Everett, Wash., said Wednesday that the Treasury had neither accepted nor denied its application to participate in its Capital Purchase Program. Frontier's, stock plunged Tuesday and continued to fall Wednesday amid rumors that the government had rejected its application, but it closed up 26.2% Wednesday.
Bank of America Corp. fell 9%, JPMorgan Chase & Co. 4.9%, Citigroup Inc. 10.7%, and Wells Fargo & Co. 5.3%.
Other decliners included U.S. Bancorp, 5.4%; Comerica Inc., 5.9%; KeyCorp, 12.6%; First Horizon National Corp., 7.6%; State Street Corp., 6.5%; and Regions Financial Corp., 6.6%.