The market bled into the close with stocks selling off sharply in the last half hour of trading as financial stocks got pummeled.

Morgan Stanley was down more than 5% on the day with other money line center banks also under fire as Bank of America stock closed below $6 a share.

What spooked the markets?

Rating agency Fitch put out a report stating the obvious: that Europe's woes would affect the U.S. financial industry as well.

Investors are slowly turning risk-averse with both year-end upon us and uncertainty hanging over the European situation like a financial sword of Damocles.

Italian Prime Minister Mario Monti's cabinet announcement did little to salve the market's concerns.

Credit spreads for financial benchmark bonds blew out wider with spreads for the Morgan Stanley 2021 and the Bank of America 2021 bonds approaching the all-time wide levels.

Bonds for European financials were not spared as Yankee (foreign issues denominated in USD) bond spreads blew out wider as well.

Financials under-performed relative to everything else but corporate names also took a hit.

There were a couple of large cash bond BWIC (bids wanted in competition) lists in the market this morning coming out of Boston.

The chatter was that the BWIC lists are related to MF Global's liquidation (there are large institutional custodians in Boston).

Dallas Fed Chief Richard Fisher gave a great (and timely) talk at Columbia University yesterday where he expounded on short-comings of the Dodd-Frank legislation and how the regulatory environment could in fact potentially encourage systemic risk.

The concept of a SIFI (strategically important financial institution) is dangerous, in and of itself, as it locks the Federal authorities into "extraordinary measures" to remedy a financial institution's woes.

Moral hazard and the inefficient use of capital are the inevitable results.

As former Kansas City Fed Chief Tom Hoenig has also consistently argued, the solution lies in a regulatory environment that does not allow banks to take risks with capital that they do not really have.

Initial jobless claims and housing start numbers are out on Thursday.