Bank stocks fell Monday as investors gave back some of the gains from a Friday rally inspired by the Treasury Department's plan to create a facility that would buy up to $700 billion in troubled assets.
The KBW Bank Index fell 10.5% after gaining 12.65% Friday.
"I think we got a little overextended with our exuberance on Friday, and investors gave back part of that," said Anthony Conroy, head trader at Bank of New York Mellon Corp.'s BNY ConvergEx Group.
In addition, "there's a lot of change going on in the way we look at how banks are being regulated, and that breeds nervousness, which breeds volatility," Mr. Conroy said.
In a concession to Democrats about loan modifications, the Treasury proposed requiring Monday that any company that services whole residential mortgages purchased by the government agree to rework loans. The Treasury is also required to agree to any reasonable modification for loans that underlie assets it purchases.
Whether this will go far enough to satisfy Democrats is unclear; the Treasury's proposal is expected to move through Congress this week.
Morgan Stanley rose during most of Monday's session but fell late to close down 0.44%. The increase was fueled by an announcement that Mitsubishi UFJ Financial Group Inc. agreed to buy up to 20% of the investment company. Late Sunday the Federal Reserve Board said it would allow Morgan Stanley and Goldman Sachs Group Inc. to become bank holding companies. Goldman's stock fell 6.95%.
The Dow Jones industrial average fell 3.27%, while the Standard & Poor's 500 fell 3.82%.
Decliners include JPMorgan Chase & Co., which fell 13.3%; Washington Mutual Inc., which fell 21.6%; Wells Fargo & Co., which fell 11.6%; Wachovia Corp., which fell 21%; UMB Financial Corp., which fell 24.6%; and Huntington Bancshares Inc., which fell 23.1%.