Friday, February 20, 2009
Nationalization Fears Dominate BofA, Citi

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Fears the government will need to nationalize the most troubled U.S. banks dominated the financial sector on Friday, briefly sending Bank of America (BAC: 3.65, -0.26, -6.65%) to levels unseen since 1984 and Citigroup (C: 2.02, -0.49, -19.52%) below 18-year lows.

However, BofA and much of the stock market recovered in dramatic fashion Friday afternoon after the White House threw cold water on talk that the government will take control of parts of the financial system.

“This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring they are regulated sufficiently by this government,” White House spokesman Robert Gibbs said in a news conference. “That’s been our belief for quite some time and we continue to have that.”

Citi and BofA — which together have absorbed nearly $100 billion of U.S. taxpayer money in recent months — were the focal points of the nationalization talk that has increased in volume in recent days.

Jitters over nationalization, which would likely wipe out common shareholder equity, were bolstered Friday afternoon after Sen. Chris Dodd, chairman of the Senate banking committee, addressed the issue on Bloomberg by saying: “I’m concerned that we may end up having to do that, at least for a short time.”

BofA CEO Ken Lewis slammed the nationalization talk by saying in a statement Friday: “Speculation about nationalization is based on a lack of understanding of our bank’s financial position.” The embattled CEO said speculation is also based on “a lack of appreciation for the adverse ramifications for our customers and the economy.”

BofA’s stock had plummeted to as low as $2.53 but made a dramatic comment following the White House comments, ending the day down only 3.6% at $3.79. Cit’s shares recovered less so, ending at $1.95 after falling as low as $1.61.

The markets and financial stocks in particular have been in freefall since last week when Treasury Secretary Timothy Geithner unveiled the administration’s financial rescue plan, which many have criticized as lacking specifics on what officials will do to help the most troubled banks.

“Nationalization fears are most certainly warranted, and whether you agree with that particular course of action or not, the reality is that it is, and should be, on the table,” said Dan Greenhaus, equity analyst at Miller Tabak. Greenhaus said the markets shouldn’t be scared of this option, rather concerned about the government’s ability and willingness to quickly relinquish control of the banks once they are stabilized.

Nationalization talk picked up steam after Alan Greenspan, former Federal Reserve Chairman, recently told the Financial Times “it may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.”

BofA’s Lewis told senior leadership at his company that he has been reassured by policy officials in Washington that nationalization isn’t on the table, The Wall Street Journal reported Friday. Lewis was issued a subpoena last week by New York Attorney General Andrew Cuomo, the Journal reported Friday, citing people familiar with the matter. Cuomo is investigating whether the bank withheld information from investors, which would violate state law.

Citi, which plunged to 18-year lows on Friday, is not in talks with the U.S. government about nationalization, Reuters reported. The New York financial conglomerate told Dow Jones its capital base is “very strong,” it is making progress to reduce assets on its balance sheet and streamlining businesses for future profit growth.

Also, New York Governor David Paterson told reporters on Friday that he is not involved in talks regarding Citigroup or a potential nationalization. He had been involved in the rescue of American International Group (AIG: 0.5389, -0.0611, -10.18%) last year.

The Treasury Department is set to initiate a “stress test” on up to 25 of the nation’s banks to see which may need additional capital.

Greenhaus said the government needs to do something to address the toxic assets stuck on banks balance sheets in order to allow the economy to heal.

“Times are tough and as we get ready to find out that five million people will be getting unemployment benefits in the coming weeks, and that we’ve lost over four million jobs this cycle on our way to six million, it is absolutely in our best interest to try everything we can to arrest this economic decline lest a severe recession metastasize into something far, far more dangerous,” Greenhaus said.

Citi and BofA have each lost more than 90% of their market value amid the year-long recession. Citi’s market cap has shrank to $11.5 billion, making the one-time banking titan worth less than Northern Trust (NTRS: 56.49, 1.42, 2.58%).

BofA, which is the largest U.S. bank by assets, told Dow Jones Newswires Friday: “We see no reason to nationalize a bank that is profitable, well capitalized and actively lending.” BofA, which took over Merrill Lynch in a now-controversial acquisition, posted its first quarterly loss in 17 years in January.

But Citi and BofA aren’t alone as Wells Fargo (WFC: 10.18, -2.32, -18.56%), which acquired Wachova last year amid the height of the credit crisis, plunged to fresh multi-year lows on Friday.

While major banks like Goldman Sachs (GS: 84.76, -0.9601, -1.12%) and JPMorgan Chase (JPM: 20.63, -0.15, -0.72%) saw more modest selling, regional banks like Fifth Third Bancorp (FITB: 1.03, -0.18, -14.88%) and PNC Financial (PNC: 23.35, -0.63, -2.63%) plunged even further to new 52-week lows.

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