Bank of America, the nation’s largest bank by assets, plunged 20 percent and Citigroup slid 16 percent, leading the KBW Bank Index (BKX) down 11 percent. It was the worst showing for the 24-company benchmark since April 20, 2009, when Bank of America told investors it was putting aside more money to cover a growing pool of uncollectible loans.
There is more here, and you can think of that price change as showing much higher tail risk. LinkedIn fell twenty percent (revenues are connected to recruiting), and Asian markets continue to fall. Treasury securities are stockpiled there, plus the general patina of American power and influence probably benefits Asia more than any other region. That’s the tragedy of this downgrade — the negative shock to American power and influence effect, not any enhanced probability of default. The CDS prices support that interpretation, but don’t neglect the broader geopolitical ramifications. Marketing and signaling really matter, and this remains a very definite step away from the idea of having another American Century. Contrary to Atrios, whether we like it or not, a lot of people — mostly not idiots — really do care what S&P thinks. I would have to put his quotation down as the least prophetic sentence of the year. Further equity price declines seem on the way.