There was optimism (Obamtimism?) in the air in the nation's capital, but financial stocks did their best to rain on yesterday's parade for President Obama, sending the Dow Jones industrial average to its biggest Inauguration Day decline ever.  The markets were closed Monday in observance of Martin Luther King, Jr. Day, and they opened down on Tuesday.  This was following reports on Friday that Bank of America lost $2.6 billion and Citigroup lost $8.3 billion in the last quarter of 2008.  So banks led the decline. 

State Street, the Boston based custody bank saw its shares drop 59% after announcing profits declined 71% last quarter.  State Street's woes are fodder for critics of the bailout, as the bank appears to have a capital shortage after it received money under TARP last year.  From DealBook at the New York Times:

Analysts and investors are worried that State Street's continued losses on bond funds and other investments could cause credit agencies to lower their ratings on the company, making it more costly for it to finance continuing operations. The company, which received $2 billion last year from the federal bailout fund, the Troubled Asset Relief Program, or TARP, may have to raise additional equity capital to avoid a ratings downgrade.

A spokeswoman for State Street said TARP money was not used to prop up the stable value funds.

A key issue for investors revolves around State Street's tangible common equity - a measure of the company's leverage and its ability to absorb financial shocks. If the unrealized losses on State Street's commercial paper conduits were realized on its balance sheet, its tangible common equity ratio would fall to 1 percent, from about 3 percent in the prior quarter.

State Street bills itself as "the world's leading provider of financial services to institutional investors."  So the question now is, what are the ripple effects of State Street's troubles for those institutions?