Washington: As their market values fall far below the level of funds received by the government, top US banks have become virtually state owned, with investors fearing their imminent nationalization.
Despite repeated assurances by President Barack Obama’s administration that it prefers banks to remain in private hands, investors are dumping banking stocks, especially those of Bank of America and Citigroup, fearing they may come under outright government control amid unending financial turmoil.
The top two banks have been driven down almost to penny stock levels even after the government injected $90 billion into them and promised to limit losses on more than $400 billion of their total troubled assets.
Bank of America’s market capitalization at the weekend dropped to $24.23 billion while that of Citigroup to $10.63 billion - much less than the $45 billion taxpayer-funded capital received by each of them.
“The two banks are implicitly nationalized, which is what is rocking investors in the financial sector,” said Gregori Volokhin, a strategy chief at Meeschaert New York.
“It’s necessary to have clarity on the situation,” he said. “And for things to be clear, a temporary nationalization is in the cards, which will allow, when things improve, the government to exit without having lost enormous sums,” he said.
Already having de facto ownership, the government may now move to seize full control of these banks in a bid to remove toxic assets that have tainted their balance sheets and the financial system for more than a year, analysts say.
“They’re pursuing a banking policy that makes nationalization inevitable,” said Peter Morici, a business expert at the University of Maryland.
“They already own quite a bit of these two banks, so it makes it highly questionable whether anybody should put money into the stocks, because at the end, the government is probably going to just take these two banks.”
Treasury Secretary Timothy Geithner said two weeks ago that the authorities would conduct “stress tests” on ailing banks to determine the health of the institutions before injecting any more capital or taking other actions.
He said that the government would partner with private investors to purchase the troubled bank assets but gave few details about how the plan would work, leaving investors uncertain about its chances for success and fueling speculative market activity.
Last year, California-based mortgage lender IndyMac was declared bankrupt and taken over after a run triggered by excessive speculation over the bank’s soundness.
Since Geithner’s announced plan to pump more capital into banks and try to jumpstart credit markets about two weeks ago, financial stocks have been hammered down.
In Wall Street’s broad S & P stock index, “almost everyday it’s financial that is down 5% to 7% while the rest of the market is most down 2 or 2-1/2%.” said Busch.
Geithner appears to be wrestling with a key problem - how to transfer the “toxic” assets off bank balance sheets onto a platform which can be re-priced, repackaged, and sold to private investors at an appropriate price, said Frederic Dickson, chief market strategist at DA Davidson & Co.
As bank shares dived Friday, White House and the Treasury officials moved to dispel rumors of nationalization but market concerns persist on the impact of any deeper government role in the banking system.