The Dow logged its biggest two-day drop since June on Thursday. Big financials led today's decline as President Obama rattled the market with plans to crack down on Wall Street risk taking. But regional banks continued to shine.
The Dow lost 213.27, or 2 percent, to close at 10,389.88. That brings it's two-day decline to 3.1 percent, its biggest two-day decline since June.
The S&P lost 1.9 percent and the Nasdaq shed 1.1 percent.
The CBOE volatility index, widely considered the best gauge of fear in the market,soared about 20 percent to 22.27, after falling back around 17-18 in the past few sessions.
President Obama proposed new limits on the size and trading practices of big banks, saying he wanted to prevent a return to the "old practices" that led to the financial meltdown.
"While the financial system is far stronger today than it was one year ago, it is still operating under the exact same rules that led to its near collapse," Obama said in a statement.
Obama said banks shouldn't be allowed to own a hedge fund or use their own money to make bets with hedge funds.
Big banks were crushed by Obama's remarks: Bank of America , Morgan Stanley , JPMorgan and Goldman Sachs were all down more than 4 percent.
The president's comments overshadowed Goldman Sachs's stellar results: The bank blew past expectationswith earnings of $8.20 a share — a full $3 higher than analyst estimates.
Exchange operators also took from the president's remarks. The Dow Jones Global Exchange index was off more than 3 percent and near its lowest since November, while derivatives-exchange operators CME Group and IntercontinentalExchange were at multi-month lows.
The impact was tempered by comments by Rep. Barney Frank, chairman of the House financial-services committee, a few hours later on CNBC. Frank said he would support bank-rule changes—but only over a longer time frame, which he said would be in the range of "three to five years."
Major indexes pared their losses after Frank's comments.
Regional banks, which wouldn't really be affected by Obama's new rules, continued to shine after some encouraging earnings reports from Fifth Third and KeyCorp. Fifth Third reported a much smaller-than-expected loss and, like Bank of America a day earlier, noted an improvement in credit trends. KeyCorp said its loss narrowed and also noted an improvement in economic conditions.
Regional banks were some of the top (and only) gainers on the S&P 500, including Comerica, SunTrust, Fifth Third, Huntington Bancshares and KeyCorp, and several were at new 52-week highs, including Fifth Third, Comerica and SunTrust.
In fact, it's been quite a year so far for regional banks. While the broader market was stumbling through the first few weeks of 2010, most regional banks were enjoying double-digit percentage gains: Zion and Synovus are up more than 40 percent, while KeyCorp, Regions Financial and Marshall & Ilsley are up more than 30 percent. By comparison, Bank of America is up just 3 percent, while Citi, Morgan Stanley, JPMorgan and Goldman Sachs are all lower.
PNC Financial Services is an interesting story in the sector: It's one of the strongest survivors of the financial crisis and its stock is up 11 percent this year. Plus, it beat its earnings target today. But the stock is off 4 percent today as the company said it set aside more money for loan losses and hasn't yet given a timeframe for paying back government bailout money.
The dollar fell sharply against the yen and gave up its earlier gains against the euro after Obama's remarks.
Energy stocks took a hit as oil fell more than $1 a barrelto close at $76.08 a barrel.
Worries about China also loomed large over the market, even as China's GDP jumped 10.7 percentin the fourth quarter.
McDonald's and Travelers were the only advancers on the Dow — and the gains were modest.
EBay led the Nasdaq 100 after the online auctioneer beat estimates thanks to a healthy holiday shopping season and gave a rosy outlook.
Apple ticked higher amid anticipation of an announcement from the company about a new tablet e-reader.
Starbucks beat estimates and posted its first quarterly same-store sales gain in two years and said it's ready to explore the European market.
And GE's NBC finally reached a deal with Conan O'Brien, agreeing to pay the host and his staff $45 million for their exit, clearing the path for Jay Leno to return to host the "Tonight Show," which he previously hosted for 17 years.
GE reports earnings tomorrow before the bell.
In U.S. economic news: Jobless claims unexpectedly rose by 36,000 last week but the Labor Department clarified that it was an administrative uptick, not an economic one. The Philadelphia Fed index dropped to 15.2in January from 22.5 in December but leading indicators rose 1.1 percent in December.
Crude inventories declined by about 400 million barrels last week, the EIA reported. And the average on the fixed 30-year mortgage rate fell below 5 percentlast week, the first time it's dropped below that level since mid-December, Freddie Mac reported.
Volume was average, with about 1.5 billion shares changing hands on the New York Stock Exchange. Decliners outpaced advancers, roughly 4 to 1.
Still to Come:
THURSDAY: Earnings from American Express, Google, AMD and Capital One after the bell
FRIDAY: House hearing on financial-industry compensation; earnings from GE, McDonald's, Schlumberger, Kimberly-Clark and SunTrust
Send comments to cindy.perman@nbcuni.com.
