Morgan Stanley (MS:US) and Goldman Sachs Group Inc. (GS:US) dropped the most in the last 12 months as Europe’s debt crisis reignited and investors speculated that President Barack Obama’s re-election means tighter curbs on banks.
The two securities firms led U.S. financial stocks lower after Obama defeated Mitt Romney and European Central Bank President Mario Draghi said the region’s crisis is hurting Germany, its biggest economy. Goldman Sachs fell 6.6 percent to $117.98 at 4:15 p.m. in New York and Morgan Stanley tumbled 8.6 percent to $16.63. Bank of America Corp. (BAC:US) dropped 7.1 percent.
“Bankers were hoping Romney would win and give them more sympathetic regulators or that Republicans would take the Senate and they could rewrite Dodd-Frank,” said Edward Mills, a bank policy analyst at FBR Capital Markets and former aide on the House Financial Services Committee. “The floodgate is going to open for the final rules under Dodd-Frank,” he said, referring to the 2010 law designed to overhaul banking rules.
JPMorgan Chase & Co. (JPM:US), the biggest U.S. lender by assets, fell 5.6 percent. That was the most in six months, since the day after disclosing a $2 billion trading loss in a London unit.
Citigroup Inc. (C:US), ranked third, declined 6.3 percent. It’s based in New York along with JPMorgan, Goldman Sachs and Morgan Stanley. San Francisco-based Wells Fargo & Co. (WFC:US), the biggest U.S. home lender, fell 3.5 percent. Bank of America is ranked second by assets and based in Charlotte, North Carolina.
Obama’s win and the election of industry critics such as Elizabeth Warren to a Democrat-controlled Senate signal more “misery” ahead for financial firms, according to David Trone of JMP Securities LLC.
Investors had bought shares in the five biggest U.S. banks amid hope that a Romney White House and a divided Senate would repeal some of the “burdensome” costs that Obama championed, Trone wrote to clients. These included bigger capital buffers, more compliance programs and less fee revenue, he wrote.
With the House still under Republican control, lawmakers and the Obama administration may “fight brutally” over a solution to the so-called fiscal cliff, and tax increases and spending cuts could trigger a U.S. recession, Trone wrote.
Warren, a Harvard University professor, unseated Massachusetts Republican Senator Scott Brown. She will serve with Republicans who previously made clear they would block any attempt by Obama to appoint her to lead the new Consumer Financial Protection Bureau, which she helped establish over objections of bankers.
U.S. banks outperformed the Standard & Poor’s 500 in six out of the last eight trading sessions leading up to Election Day, and closed near their highest levels for the year yesterday, said Jason Goldberg, senior banking analyst at Barclays Capital.
“The market was pricing in an increasingly higher chance that Romney would win,” Goldberg said. Investors thought “if Romney was elected, the path to interest rates would be higher and that would be good for banks,” Goldberg said. Romney also would have been “kinder” in drafting new rules required by the Dodd-Frank overhaul, he said.
Bloomberg’s Europe Banks and Financial Services Index, which tracks 38 companies in the region, dropped the most in almost three weeks, sliding 1.9 percent. Germany’s 2013 growth forecast was cut to 0.8 percent from 1.7 percent amid a slowdown in the continent’s economy, the European Commission said today.
“Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area,” Draghi said today at a Frankfurt conference. “The latest data suggest that these developments are now starting to affect the German economy.”
Banks spent millions of dollars lobbying to block or dilute new rules that cut into their profit. With Obama’s election, FBR’s Mills said, “the industry has gone from a posture of trying to delay to now where they are going to be pushing for certainty.”
Warren isn’t the first pro-consumer lawmaker in Congress, “but no other consumer advocate has been able to capture the attention of the nation and take on Wall Street and win, and she’s likely to sit on the Senate Banking Committee,” Mills said. “Not only do Democrats hold the Senate, they now have a fierce defender in the Senate to any potential change to Dodd- Frank.”
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