Analysis: Recent market turbulence could help build support for financial overhaul bill

WASHINGTON (AP) — The stomach-churning fear about Wall Street's turbulence is roaring back.

Europe's spreading debt crisis, fraud charges against Goldman Sachs and a 1,000 point nose dive in the Dow Jones industrials are turning up the heat on Congress to get the nation's financial house under control.

If it continues, the stock market's dizzying plunge could threaten the fragile recovery even as other economic indicators — including the biggest monthly gain in employment in four years — suggest the U.S. is rebounding faster than its European trading partners.

Investors appeared to be looking beyond the improving economic data to focus on vivid images of riots in Greece, floods in the South, the oil spill in the Gulf of Mexico and the Times Square bombing attempt.

There's already deep public hostility toward Wall Street institutions, so the Dow's extreme volatility seemed likely to work to the advantage of the backers of the Senate's financial regulation overhaul bill.

The meltdown was cited by supporters as one more reason to tighten lightly regulated high-speed computerized trading practices. Both parties are angling to harness the anger toward Wall Street bailouts and bonuses for political gain in the fall elections.

A robust stock market "is key to the recovery. It's vital to keeping high-income households spending. It's key to business that have started to hire again," said Mark Zandi of Moody's

"Business leaders are taking a signal from their stock price. If their stock prices fall, they're not going to hire. The recovery's going to be short circuited," said Zandi, a one-time adviser to GOP presidential nominee Sen. John McCain who now counsels congressional Democrats.

"This volatility is not good for anybody and I think it's very important for someone to try to figure it out," he said.

It didn't take long for politicians to jump into the fray.

President Barack Obama said regulators were looking into Thursday's market panic "with a concern for protecting investors and preventing this from happening again."

While the Senate legislation, an Obama priority, does not now address stock trading issues, attempts are under way to change that.

Sens. Ted Kaufman, D-Del., and Mark Warner, D-Va., proposed requiring the Securities and Exchange Commission and the Commodity Futures Trading Commission to scrutinize high-frequency trading and other computerized strategies that move buy and sell orders at blinding speeds — practices that may have contributed to Thursday's snowballing sell-off.

Rep. Paul Kanjorski, D-Pa., scheduled a Tuesday hearing of the House Financial Services subcommittee that he leads. "We cannot allow a technological error to spook the markets and cause panic," he said.

Investors got an unmistakable reminder of how quickly their fortunes can change on Thursday when the Dow took a short but unprecedented 1,000-point tailspin. The sudden drop — generally believed to be due to trader error and computer glitches — sent the stocks of several companies briefly to almost zero.

The Dow partially rebounded to finish the day down 347 points, or 3.2 percent. But turbulence continued on Friday, with the Dow falling nearly 280 points at one point before ending the day with a 140-point drop.

The losses came despite Friday's strong U.S. jobs April report, approval by Greek lawmakers of drastic austerity cuts needed for international rescue loans worth $140 billion and approval of the package by both houses of the parliament in Germany, where bailing out Greece is unpopular.

A Greek default could be dire. Greece's troubles already have dealt a blow to the euro and could result in far higher borrowing costs for other indebted European countries. The crisis eventually could cross the Atlantic to the United States, which is facing its own debt and borrowing problems that in some ways resemble Greece's.

The U.S. stock sell-off, coupled with the government's civil fraud charges against the investment bank Goldman Sachs, should help build momentum for the regulation bill and hand Obama another legislative victory to follow health care overhaul, said American University political scientist James Thurber.

"It sets even more of an environment to get the thing through," Thurber said. "It triggers oversight hearings and concern about unregulated off-Wall Street trading institutions and computerized trading."

Stock trading increasingly has become dependent on computers that process trades automatically, speeding the flow of buy and sell orders, often on new electronic exchanges far removed from trading floors. What is known as high frequency trading — rapid automated buying and selling — now accounts for more than half of daily trading volume.

It was not clear whether the market's jitters would calm with the release of more good economic news — or threaten to plunge the economy into a double-dip recession with a return of the rout that drove stocks down to bargain basement levels in 2008 and early 2009.


EDITOR'S NOTE — Tom Raum covers economics and politics for The Associated Press.