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DealBook Briefing: How Monday’s Stock Plunge Ranks?

Credit...Drew Angerer/Getty Images

Good Monday. Here’s what we’re watching:

• There have been far blacker Mondays.

• Kenneth C. Griffin is growing concerned about inflation.

• The Fed’s regulatory action against Wells may have some bite.

• Broadcom puts more pressure on Qualcomm

• How worried should JPMorgan clients be about health care?

• How much more will Wells Fargo have to do?

We could use your help: Our colleagues who broke the Harvey Weinstein story are looking at how corporate codes of conduct are changing. Please tell them here, and say we sent you.

The Dow Jones industrial average plunged 1,175.21 points, or 4.6 percent, to 24,345.75 on Monday, while the Standard & Poor’s tumbled 113.19 points, or 4.1 percent, to 2,648.94.

Measured by points, those are steep drops — the biggest on record for the indexes. The previous largest point declines for each benchmark came in 2008, at the height of the financial crisis.

But Monday’s plunge was far less impressive on a percentage basis. The Dow’s fall ranked as its 100th biggest, while the S. & P. 500’s slide was the 127th biggest in the index’s history, according to S & P Dow Jones Indices.

Here is how Monday’s sell-off stacks up against two other major tumbles.

• Dow: Down 777.78 points, or 6.98 percent

• S. & P. 500: Down 106 points, or 8.81 percent

Just weeks after Lehman Brothers failed in September 2008, lawmakers in the House defied President George W. Bush and rejected a $700 billion economic rescue plan. The vote sent markets tumbling to what was the biggest point loss in either index’s history.

But points are not the best way to compare the magnitude of a stock index’s declines across eras. As the stock market has risen, big point moves have translated into increasingly smaller percentage changes. The Dow and the S. & P. 500 have more than doubled from their closes on Sept. 29, 2008.

• Dow: Down 507.99, or 22.61 percent

• S. & P. 500: Down 57.86, or 20.47 percent

“Black Monday” was a petrifying moment — an even bigger decline in both points and percentage than the stock market crash of 1929. But unlike the 1929 crash, the slide in 1987 did not contribute to a wider economic slump. The stock market recovered its losses by early 1989.

But the plunge did prompt regulators to introduce special brakes that kick in when the market falls too far, too fast. Stock markets, though, remain vulnerable to the sort of confusion and fear that one prominent economist said last year was a potent force in 1987.

— Stephen Grocer and Peter Eavis


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Kenneth C. GriffinCredit...Heidi Gutman/CNBC

As the U.S. stock markets look wobbly for the first time in nearly two years, at least one major investor is sounding a bearish tone.

In a Jan. 31 letter to investors, Kenneth C. Griffin, founder of the Chicago hedge-fund firm Citadel, wrote that even though the broader economic backdrop continues to be positive, he sees several warning signs that could turn stock prices downward.

The end of the Federal Reserve’s efforts to stimulate the U.S. economy is one factor, Mr. Griffin wrote, that could pressure stocks. But the prospect of inflation, or a rapid rise in the prices of goods and services, is making him especially nervous.

“We are particularly concerned about the nascent signs” of rising inflation in a variety of countries, he wrote. As a result, he added, money managers at Citadel, which runs a variety of hedge funds, are “carefully positioning” for a surprise, sharp upturn in inflation.

Mr. Griffin added that he is also concerned about geopolitical risks, writing that his money managers need to be able to handle negative events if they do occur, “including a trade policy misstep or a military conflict.” He did not elaborate.

In an interview with CNBC in November, Mr. Griffin said the stock market was in the “seventh inning” of a rally. He said through a spokesman on Monday that he still thinks there are several innings to go before a downturn begins and that he is more bearish on bond prices than stocks at the moment.

— Kate Kelly

With 50 percent of the companies in the S.&P. 500 having reported results, profits are on pace to grow 13.4 percent, according to FactSet. If that growth rate holds through the end of earnings, it would mark the third quarter in the past four that S.&P. 500 companies have reported a double-digit profits increase.

The numbers

•75 percent of companies are reporting earnings above estimates, above the five-year average.

• Companies that are beating estimates are doing so by a 4 percent margin, below the five year average.

•80 percent of companies have reported revenue above estimates, a record high.

• All 11 sectors are reporting earnings growth.

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The Federal Reserve’s actions do not affect Wells Fargo’s financial condition, the bank’s chief executive said on Friday night.Credit...Matt Rourke/Associated Press

A Federal Reserve regulatory action, announced Friday evening, placed a cap on the amount of assets (loans and securities) that Wells Fargo can hold. The Fed took this action in response to misconduct at the bank that involved deceiving its customers. The cap will be in place until the Fed is satisfied that the bank has made sufficient improvements in its operations and corporate governance.

Wells Fargo’s stock is down more than 7 percent Monday, suggesting that investors believe the growth cap will have some bite. With the economy strengthening and interest rates rising, banks can expect to earn higher profits as they make more loans and suffer fewer losses from defaults. Indeed, this optimistic scenario has helped send bank stocks on a tear in recent months. Now, the question is to what degree Wells Fargo will have to sit out the good times.

Wells Fargo executives on Friday suggested that the cap would have limited financial impact, saying it would reduce this year’s net profits by $300 million to $400 million, which works out at less than 2 percent of 2017’s earnings. One reason the earnings hit might be small is that the bank can stay within the cap by selling short-term, lower-risk investments that don’t earn much. Another way the bank intends to limit the negative impact is by reducing the amount of deposits on which the bank pays out a relatively high interest rate.

Crucially, Wells Fargo said that it hopes to increase the size of its loan book. The hope is that, by shedding the low-risk investments, the bank will create the room to make more mortgages, credit card loans and loans to businesses, while staying within the limit.

But it may not turn out to be as straightforward as that.

The growth cap comes after a lackluster year for Wells, which reduced its loans 1 percent last year, compared with an increase of 3.5 percent at Bank of America. Investors waiting for catch-up growth at Wells may have to wait still longer. Also, much depends on whether Wells Fargo can now satisfy the Fed’s concerns. Any indication that the bank is struggling to comply with the regulator’s demands could set off more turmoil at the bank. There is also a possibility that the tactic of shedding of low-risk investments while making more loans could increase the overall risk of Wells Fargo’s balance sheet.

Brian Kleinhanzl, a banks analyst at Keefe, Bruyette & Woods, wrote on Sunday that the Fed’s action will “mean Wells will have a harder time maintaining market share and will have to compete more on price or credit terms versus peers,” adding, “Wells will also have to maintain the balance sheet while other banks are growing, and we view this as defensive versus peers.”

— Peter Eavis


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A Broadcom takeover of Qualcomm could be the largest deal in tech industry history.Credit...Mark Schiefelbein/Associated Press

In raising its takeover bid to about $121 billion just now, Broadcom is hoping to allay concerns about its takeover bid and its quest to create a behemoth in computer chips.

What Broadcom is offering:

• A takeover price of $82 a share, up from its original offer of $70

• A “significant” breakup fee if a deal were to be halted for antitrust reasons

• A “ticking fee” that Broadcom would pay in cash if a deal took more than a year to close

It said the new “best and final” offer would be withdrawn if Qualcomm either pushed its annual shareholder meeting back from March 6 (when Broadcom hopes to unseat the entire board) or if it paid more than $110 a share for NXP Semiconductor.

The context: Qualcomm recently reported a 96 percent drop in operating income amid a royalty dispute with Apple. That has given Broadcom some pause, but not enough to make it walk away.

What’s next: This offer isn’t likely to tempt Qualcomm. It has a better chance of tempting investors, who might then press the chip maker into negotiations.

Bitcoin is down 14 percent Monday to $7,360. That’s a more than 60 percent decline from its high of $19,511 hit on Dec. 8.

Other cryptocurrencies are falling as well. Ripple, Ethereum and Litecoin are all down Monday.

How far can Bitcoin fall?

Simon Tobler, a trader at Swiss-based Crypto Finance AG, told Bloomberg: “If we don’t hold the $8,000 level, Bitcoin may fall to $5,000, where the next big support is. The market is lacking big buyers.”

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Jamie Dimon is said to have been hitting the phones.Credit...Eric Piermont/Agence France-Presse — Getty Images

Ever since the bank announced a partnership with Amazon and Berkshire Hathaway to create a new health care company, it appears that many have been very worried.

More from Anna Wilde Mathews, Dana Cimilluca and Emily Glazer of the WSJ:

In a reflection of the sensitivity of the subject, JPMorgan Chief Executive James Dimon hit the phones Tuesday to assuage clients’ concerns, people familiar with the matter said. So did some of the firm’s health care bankers, who get paid handsomely to help clients with mergers and other deals and worry the move could cost them business.

One response: Ultimately, Mr. Dimon, Jeff Bezos and Warren Buffett are working on a sort of group-purchasing venture, according to some of JPMorgan’s bankers. That’s far less transformative than some on Wall Street had hoped — or feared.

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Credit...Ali Asaei

On Janet Yellen’s last day atop the Fed (see below), the regulator demanded that Wells Fargo replace four directors and capped the bank’s growth. The goal: to send a message.

More from Emily Flitter, Binyamin Appelbaum and David Enrich:

The settlement is an attempt by the Fed to impress upon banks that their boards of directors should be vigorous, independent watchdogs — and if they fail, there will be consequences. That reflects a shift from regulators’ historically hands-off approach to corporate boards, and the boards’ role is likely to grow in importance as regulators appointed by President Trump and Republicans in Congress generally loosen the reins on big banks.

Behind the scenes: Wells Fargo executives were irate that the Fed’s announcement trumpeted the replacement of the banks’ directors, and that it implied the boardroom changes came at the Fed’s instruction.

The big question: Will Wells Fargo have to do more than it just agreed? Gillian Tan of Gadfly suggests that Timothy Sloan, who became the bank’s C.E.O. after the scandals, may have to go.

• Paul Ryan deleted a tweet crediting the tax overhaul for a secretary’s $1.50-a-week pay raise. He’s still being mocked for it. (NYT)

• The federal government is set to nearly double its borrowing this fiscal year, to $955 billion. (WaPo)

• Democrats on the House Intelligence Committee plan to push for the release of their own memo rebutting the one by Representative Devin Nunes about the surveillance of a Trump campaign aide. Mr. Nunes said he, too, had more memos to release.

• Senator Dick Durbin, Democrat of Illinois, said that Congress is unlikely to reach an agreement to protect the immigrants known as Dreamers this week, despite a Feb. 8 government funding deadline. But John McCain and Chris Coons plan on introducing a bipartisan immigration bill anyway.

• Jeff Sessions’s silence in the wake of President Trump’s attacks on the Justice Department has weakened morale there. (NYT)

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Credit...Lexey Swall for The New York Times

The now-former Fed chairwoman told PBS NewsHour that while she didn’t agree with Alan Greenspan that there were bubbles in the stock and bond markets, she did see reasons for concern.

From her interview with Judy Woodruff:

“I don’t want to label what we’re seeing a bubble — as a bubble.

“But I would say that asset valuations generally are elevated, and this is a characterization that we have offered up, for example, last summer in our monetary policy report.”

Already, investors appear more cautious, faced with a tight-looking labor market and central banks potentially preparing to raise rates and take away the easy-money punch bowl.

Today’s update: Both Asian and European stock markets continued Friday’s declines.

More from Ms. Yellen: She also spoke about being the first Fed chair in history not to be renominated after a full term. “Well, I would have liked to serve an additional term, and I did make that clear. So, I will say that I was disappointed not to be reappointed,” she said.

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Jeffrey Smith, chief executive of Starboard Value.Credit...Rick Wilking/Reuters

Starboard Value, the activist hedge fund, has taken up a new line of attack as it pushes for change at the chip maker Mellanox. It is accusing top executives and board members of not having enough faith in their company.

The criticism: Starboard says Mellanox management and directors have sold shares more than 370 times since the company’s I.P.O., while buying its shares on the open market just once.

The bigger picture: Starboard is trying to unseat Mellanox’s entire board, arguing that the company needs either to improve its business, including by being more focused in its research spending, or to consider selling itself.

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Jeff Bezos of Amazon with, from left, the actors Matt Damon, Taika Waititi and Chris Hemsworth after the Golden Globes last Sunday.Credit...Alberto E. Rodriguez/Getty Images

Here’s a summary of the case for that, put forth by Ed Lee at Recode:

• Getting bigger by merging with another media company doesn’t solve CBS’s problems. Selling to a tech giant with great online distribution does more.

• Amazon’s exceptionally deep pockets would let CBS bid for expensive must-watch content like sports rights amid tougher competition.

The very big question: Would Shari Redstone, who with her father controls both CBS and Viacom, allow a deal that didn’t involve both companies?

The deals flyaround

• Is debt driving Dell’s deliberations about a potential I.P.O. or deal with VMware? Maybe less than you’d think. (NYT)

• Soho House, the operator of trendy members’ clubs, has hired Goldman Sachs and JPMorgan Chase to lead a planned I.P.O. (FT)

• Does the deal boom signal a top for the debt markets? (FT)

• The Carlyle Group, Bain Capital and Apollo Global Management are among those jockeying for Akzo Nobel’s chemicals unit, according to unnamed sources. (FT)

• GlaxoSmithKline and Reckitt Benckiser were the only bidders for Pfizer’s consumer unit, according to unnamed sources. (Bloomberg)

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Credit...Dong-a Ilbo, via Agence France-Presse — Getty Images

A South Korean appeals court reduced and suspended Lee Jae-yong’s sentence for bribery and corruption.

A lawyer for Mr. Lee said that his client would appeal to South Korea’s Supreme Court to be declared innocent of the remaining charges. Prosecutors haven’t yet said if they’ll appeal. But critics of the country’s conglomerates had hoped that Mr. Lee’s original, unusually long sentence — five years — would herald tougher regulation.

The context: Samsung has done fine with Mr. Lee in jail: Its electronics operation is earning gangbuster profits and its semiconductor business is well positioned to keep minting money.

At $7,783, says CoinMarketCap, down another 12 percent over the past 24 hours. Other big virtual currencies are down, too.

Not helping: Credit card issuers including JPMorgan, Bank of America, Citigroup and Lloyds are now blocking purchases of virtual currency.

It helped create the template for London P.R. firms catering to foreign governments. But it went bankrupt in a tale of corporate skulduggery — working for the wealthy Gupta family of South Africa and inflaming racial tensions there — that seems lifted from “House of Cards.”

More from David Segal of the NYT:

“In my years of running the P.R.C.A., I have never seen anything worse, never seen anything equal to it,” Francis Ingham, director general of the trade association, said in an interview. “The work was on a completely new scale of awfulness. Bell Pottinger may have set back race relations in South Africa by as much as 10 years.”

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Uma Thurman in New York.Credit...Damon Winter/The New York Times

• Uma Thurman has opened up about what she described as sexual misconduct toward her by Harvey Weinstein. (NYT)

• Five women of different ages and professions gathered to discuss experiences of the gender wage gap: “That was the most humiliating experience that I have ever had.” (NYT)

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J. D. VanceCredit...Naomi McColloch

“There are a lot of entrepreneurs [in Silicon Valley] developing the next app for clothes shopping who say, not ironically, that ‘We are changing the world.’ You’re not changing the world.”

— J.D. Vance, venture investor and memoirist, in a lunch interview with the F.T.

• Unilever brought deodorant to China dreaming of a market with 2.6 billion armpits, but struggled against beliefs that it’s healthy to sweat. Other companies have hit similar cultural difficulties. (NYT)

• Early employees of Google and Facebook are among the founders of the Center for Humane Technology, which will challenge the companies they helped to build. (NYT)

• Amazon has trained markets to give it leeway. They appear to accept that it has a strategy for Whole Foods that will take time. (NYT)

• New York Times reporters bought the same ingredients for Super Bowl meatballs at a Whole Foods 365 store and a Walmart. Both the price and the outcome were different. (NYT)

• Greg Coffey, the star hedge fund trader known as “the Wizard of Oz” who retired five years ago, is raising $2 billion for a new fund focused on emerging markets, according to anonymous sources. (FT)

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