Posted 1/16/2009
The government threw a lifeline to ailing Bank of America (BAC) on Friday, but shares of the financial giant and many peers continued to sink.
The Treasury said it would inject $20 billion of new capital into BofA after the top U.S. bank said it lost $1.79 billion in the fourth quarter, its first loss in 17 years. That excludes $15.3 billion in red ink at Merrill Lynch, which it bought Jan. 1.
Washington also agreed to put up $118 billion in guarantees to help BofA absorb Merrill.
The plan follows the model used to aid Citigroup (C) last November.
Meanwhile, Citi lost $8.3 billion, bringing losses over the past five quarters to more than $28 billion.
Citi will split into one unit focused on its healthy commercial and retail banking operations and another dealing with riskier assets.
Financials Still Slide
Stocks seesawed Friday before finishing in the black. The Dow and S&P 500 rose 0.8% and the Nasdaq 1.2% despite ongoing concerns about the banking sector.
But the SPDR Financial ETF fell for a third straight day, sinking 3%.
BofA plunged 14%, Citi dived 9%, Wells Fargo (WFC) sank 7%. JPMorgan (JPM), which fell 6% Thursday despite reporting an unexpected profit, sank 6% on Friday.
Barclays (BCS) tumbled as much as 32%, paring those losses to 14% after the U.K. banking giant said it expected to top quarterly views.
Bad debts will keep mounting despite herculean government efforts to flood the financial system with cash to help banks rebuild their capital cushions, analysts said.
"I don't think the worst is behind us," said Michael Carlson, a partner in the finance and restructuring group of law firm Faegre & Benson. "The so-called toxic assets that financial institutions have are still kind of a black hole — nobody knows really how to value them, and until there is some method of removing those from the balance sheets of banks I think we're going to continue to see more rough times for banks."
Support For 'Toxic' Bank
FDIC Chairman Sheila Bair told CNBC on Friday that setting up a government-backed bank to remove bad debt from lenders' books might have "some merit."
Treasury Secretary Henry Paulson, who leaves office Wednesday, also signaled support for the idea.
Federal Reserve Chairman Ben Bernanke had previously cited a toxic assets bank as an option.
President-elect Obama's team is also reportedly mulling such sweeping rescue plans.
Bank of America agreed to stricter limits on executive compensation as part of its deal. It will also slash its quarterly dividend to a penny a share from 32 cents.
The government will receive preferred shares for its $20 billion investment in BofA. Along with prior injections of $25 billion into that bank and Merrill, the Treasury will become BofA's top shareholder with about a 6% stake.
"The banks of today are effectively nationalized by the U.S. government, whether we want to admit it or not," said Doug Roberts, chief investment strategist for ChannelCapitalResearch.com.
The Senate voted Thursday to release the second half of the $700 billion in TARP funds set aside to stabilize the financial industry.
Citi said Friday that it plans to sell its CitiFinancial consumer lending business and its Primerica Financial life insurance unit as it dismantles a decade-long strategy of acquisitions to provide a wide range of financial services to firms and consumers.
Earlier in the week, Citi announced plans to sell control of its Smith Barney brokerage to Morgan Stanley (MS) to raise badly needed capital.
"My No. 1 priority is to return this company back to profitability," Citi CEO Vikram Pandit said Friday.
Meanwhile, the government's $118 billion backstop for BofA is meant primarily to help it absorb Merrill.
BofA threatened last month to abandon the Merrill deal, CEO Kenneth Lewis said. But the government, fearing systemic collapse, promised assistance, he said.
The aid deal calls on BofA to absorb the first $10 billion in losses. But the government will cover 90% of up to $108 billion in further losses.
Yet Moody's and Fitch cut BofA's debt ratings on concerns that Merrill's losses would continue to grow.
Copyright 2000-2009 Investor's Business Daily, Inc.
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