Mixed messages from Washington about a possible government takeover of some big banks sent their shares swooning Friday and pulled down the overall stock market.
"The problem is that the national leadership is having a public discussion about nationalizing the banks," said Jim Paulsen, chief investment strategist of Wells Capital Management. "In essence, they've created a run on bank stocks."
Of particular concern is that financial-service giants struggling with troubled assets could be taken over by the federal government, possibly wiping out the companies' current shareholders. An index of 24 bank stocks fell as much as 10% before rebounding to close down 0.6%.
But stocks of some big banks finished with much larger losses. Citigroup, for example, lost 22%. Wells Fargo dropped 9%, and Bank of America gave up 3.6%.
The Dow Jones industrial average fell 100.28 points, or 1.3%, to 7,365.67, a fresh six-year low. The decline came a day after the blue-chip gauge dropped below the current bear market's previous low-water mark, reached Nov. 20. The Standard & Poor's 500 index lost 1.1% on Friday after briefly nearing its November low.
Reports that Treasury Secretary Timothy F. Geithner would release more details next week about the Obama administration's plan for dealing with the shaky banking system may have helped pull the market off its lows Friday.
A lack of specifics about the bank-rescue plan has depressed banking stocks since it was outlined by Geithner last week. And the situation was muddied further Friday by conflicting statements out of the capital.
Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) told Bloomberg News that some lenders might have to be nationalized for "a short time," while committee member Sen. Charles E. Schumer (D-N.Y.) told HuffingtonPost.com that "failed" banks should be nationalized and their shareholders wiped out.
The White House tried to tamp the talk about nationalization, insisting that its policy is to keep banks in private hands. "This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government," said White House Press Secretary Robert Gibbs.
And House Financial Services Committee Chairman Barney Frank (D-Mass.) called nationalization an option "to be avoided."
"We need a definitive statement," said Paulsen of Wells Capital. "Either do it or say you're not going to do it."
Also hurting stocks Friday were disappointing forecasts from retailers J.C. Penney and Lowe's that provided fresh evidence that the recession continues to deepen.
The Standard & Poor's 500 index dropped 8.89 points to 770.05, while the tech-heavy Nasdaq slipped 1.59 points, or 0.1%, to 1,441.23.
Gold futures jumped above $1,000 an ounce Friday as investors sought shelter in the traditional hedge against economic disaster. The metal spiked as high as $1,004.90 an ounce, surpassing its all-time high of $1,004.30 reached last March, before closing up $25.70 at $1,001.80 an ounce.
Investors also flocked to Treasuries, another perceived haven, pushing down their yields. The benchmark 10-year Treasury note fell to 2.77% from Thursday's close of 2.85%.
"There's still a big fear factor syndrome," Michael Strauss, chief economist and market strategist at Commonfund, told the Associated Press. "There is a focus on what is happening here and now instead of six months to nine months from now."
Even a nine-month time horizon may be too short, said Jack Ablin, chief investment officer of Harris Private Bank. "I told a client today that five years from now, you would be very happy if you bought stocks today," he said. "And 18 months from now, you'd probably make money. But between now and then, it's anybody's guess what will happen."
Times staff writer Maura Reynolds in Washington contributed to this report.