Banks sink stocks on Inauguration Day

By Chuck Mikolajczak

NEW YORK (Reuters) - Wall Street ushered in the Barack Obama presidency with a record Inauguration Day drop on Tuesday amid fresh signs the global bank crisis was far from over.

High expectations for details on how the new administration would address the growing banking crisis and faltering economy were dampened after the inauguration speech concluded with little new information to digest.

State Street Corp, the world's largest institutional money manager, spooked investors about what is considered one of the safest areas in banking when it said it had a $6.3 billion unrealized loss in its investment portfolio and lowered its outlook. Its shares plunged 59 percent to $14.89.

"Stocks are getting crushed because of the never-ending tragedy that has fallen upon the banking sector," said Tom Sowanick, chief investment officer of Clearbrook Financial LLC in Princeton, New Jersey.

The Dow Jones industrial average dropped 332.13 points, or 4.01 percent, to 7,949.09. The Standard & Poor's 500 Index slid 44.90 points, or 5.28 percent, to 805.22. The Nasdaq Composite Index tumbled 88.47 points, or 5.78 percent, to 1,440.86.

The decline for the Dow marked the largest point and percentage drop for the index since December 1, 2008, and the first time the Dow has been below 8,000 since November 20, 2008.

Since Obama won the election in November, Wall Street has been betting he will put plans in place to help stabilize the sliding economy and stem rising unemployment.

"I think the expectations were over the top to begin with," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco. "When you have that kind of expectation, you're going to get disappointed."

The negative tone for the financial sector was set in Britain by the Royal Bank of Scotland, which unveiled that it expects to take the biggest loss in British corporate history on Monday, when U.S. markets were closed for the Martin Luther King holiday.

The news sparked concerns about the global banking sector and hurt shares of financials, including JPMorgan Chase & Co, which was the Dow's top drag.

The KBW index of banking shares plunged nearly 20 percent to 25.34, its lowest level since 1995. The S&P Financial index fell almost 17 percent to 108.33, its lowest level in 14 years.

Citigroup's shares rose nearly 3 percent to $2.88 in extended trade after the company declared a quarterly dividend of 1 cent per share and said it had completed the sale of Citigroup Technology Services Ltd (India) for $127 million.

Bank of New York Mellon shed 2.6 percent to $18.50 in extended trade following its fourth-quarter earnings.

Underscoring the widespread selling in the regular session, the Chicago Board Options Exchange Volatility index shot up 22.86 percent -- its largest daily percentage gain since December 1, when it rose 23.96 percent, according to CBOE data. The index, also known as the VIX, is Wall Street's favorite barometer of fear.

Although the S&P 500 has rebounded from its November 21 intraday low, the broad index has fallen 10.9 percent this year on worries about the deepening global recession.