Fears of a spreading global banking crisis weighed on Wall Street early on Tuesday, sending stocks down sharply even as the market awaited the inauguration of President-elect Barack Obama. The major indexes fell more than 1.5 percent.
The Royal Bank of Scotland forecast a $41.3 billion loss for 2008, leading the British government to again bail out banks.
Investors feared the second government bailout in recent months might be a move to fully nationalize some British banks. The British government has increased its stake in the Royal Bank of Scotland to nearly 70 percent.
The moves in Britain are designed to insure banks against further losses and are similar to steps the U.S. government has made to protect Citigroup Inc. and Bank of America. Both companies reported on Friday multibillion dollar fourth-quarter losses. Citigroup also said it planned to split its operations in two in an effort to return to profitability.
The Financial Times is reporting that Bank of America will begin cutting as many as 4,000 jobs in its capital markets unit as it consolidates its operations in that division with those of recently acquired Merrill Lynch & Co.
Investors also will focus their attention on Washington as Obama is sworn in at midday as the nation's 44th president. The market will be waiting to hear whatever Obama has to say about the economy in his inauguration address. Investors are likely to focus on economic stimulus proposals being discussed in Congress.
"Most eyes will be on Washington and not on Wall Street," said Arthur Hogan, chief market analyst at Jefferies & Co. "Unfortunately while that is happening, news is getting worse."
Investors this week will also look to Congress for any insight into how the second half of the $700 billion bank bailout program might be spent.
State Street Corp., which had been performing better than most financial services companies, reported a 71 percent drop in fourth-quarter profit as it was forced to billions of dollars in write-downs on its commercial paper program and investment portfolio. The bank also said it expects 2009 operating earnings to be flat with 2008, below the company's long-term goal of 10 percent to 15 percent growth.
"Today's market is under pressure with fourth-quarter earnings season (increasing this week) and it may not have been effectively priced into the market yet," Hogan said.
Italian automaker Fiat signed a nonbinding agreement to form an alliance with struggling U.S. automaker Chrysler to share technologies and vehicle platforms. Fiat will acquire a 35 percent stake in Chrysler as part of the deal. Fiat will not invest cash, but provide access to products and platforms.
In midmorning trading, the Dow Jones industrial average fell 143.28, or 1.73 percent, to 8,137.94.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 21.14, or 2.49 percent, to 828.98, and the Nasdaq composite index fell 42.59, or 2.78 percent, to 1,486.74.
Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.44 percent from 2.34 percent late Friday. The yield on the three-month T-bill, in demand because it is considered one of the safest investments , rose to 0.12 percent from 0.11 percent late Friday.
Light, sweet crude fell 40 cents to $36.11 a barrel on the New York Mercantile Exchange.
The dollar mostly rose against other major currencies, while gold prices rose.
Overseas, Japan's Nikkei stock average fell 2.3 percent. In afternoon trading, Britain's FTSE 100 rose 0.54 percent, Germany's DAX index rose 0.03 percent, and France's CAC-40 fell 1.40 percent.
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