(Reuters) - The new Federal Reserve program to lower long-term interest rates means banks and brokerages are at risk for depressed earnings, with no real solution, and their shares reacted accordingly on Thursday.
Operation Twist, announced by the Fed on Wednesday, is a $400 billion program to raise short-term interest rates and push down long-term rates. The Fed's idea is to make credit cheaper for consumers, thereby stimulating borrowing and the economy.
The problem is that banks and brokerage firms generally borrow short-term and lend long-term, meaning that if Twist works they are squeezed.
"Nearly every line is being marked down from our prior forecasts, which were not particularly optimistic to begin with," Barclays banking analyst Roger Freeman said in a note on Thursday.
In morning trading, Goldman Sachs shares fell 3.6 percent to $94.22, their lowest level in two-and-a-half years. On Wednesday the stock closed below $100 for the first time since March 2009.
Morgan Stanley shares dropped 6.8 percent. They fell sharply on Wednesday after Twist was announced and are now down five sessions in a row, losing more than 21 percent over that period. Since its 2011 peak in mid-February, the stock has lost nearly 60 percent of its value.
Goldman has fared a little bit better, but not much. The stock is down 13 percent in the last five sessions and down 44 percent from its mid-January peak.
Banks have been hammered in recent weeks by deepening fears about slowing markets. Barclays analysts said on Thursday they expect Goldman to report a third-quarter loss, the second in its history.