January 15, 2009 / 3:22 PM / 10 years ago

Bank of America nears govt aid, Citigroup shares drop

WASHINGTON/NEW YORK (Reuters) - Bank of America Corp may receive a $15 billion government infusion to help absorb Merrill Lynch, but shares of the bank and Citigroup Inc tumbled on Thursday on worries over their ability to handle soaring credit losses.

A taxi speeds past a Bank of America branch in New York's Times Square January 11, 2008. REUTERS/Brendan McDermid

Both lenders face mounting pressure from investors that they can manage a surge in bad loans caused by a deep economic recession.

The two companies will offer more details on Friday. Citigroup is reporting fourth-quarter results at 6 a.m. EST, and Bank of America an hour later. Late Thursday, Bank of America said it was moving up its release from January 20. Citigroup was originally set for January 22.

Funds for Bank of America would come from the Treasury Department’s Troubled Asset Relief Program (TARP), and supplement a prior $25 billion infusion, a financial policy source familiar with the talks said.

U.S. President George W. Bush and President-elect Barack Obama have signed off on aid for the largest U.S. bank, which is expected to include government guarantees, the source said.

Bank of America sought the aid to absorb growing credit losses at Merrill, which it bought on January 1. CNBC television estimated the guarantee at $100 billion to $200 billion. Both Bank of America and Treasury declined to comment.

Citigroup is expected to post a fifth straight multibillion-dollar quarterly loss, with analysts expecting a loss of $1.32 per share, excluding items.

The bank is also expected to unveil a plan to significantly shrink its balance sheet and business model, a source has said. It has received $45 billion in TARP money.

Bank of America is expected to post a quarterly profit of 19 cents per share, according to the average analyst expectation, but some analysts look for a loss.


The deep recession could further erode capital, and analysts have raised the specter that both Bank of America and Citigroup could be nationalized at taxpayer expense.

That would follow similar moves involving mortgage finance companies Fannie Mae and Freddie Mac and banks in Great Britain and Iceland.

Meanwhile, Ireland’s government nationalized Anglo Irish Bank Corp Plc on Thursday.

Investors worry that soaring losses from consumer and business loans will require further federal assistance.

“They both will likely become wards of the state,” said Doug Kass, who heads the hedge fund Seabreeze Partners Management, referring to Bank of America and Citigroup. “They are too big to fail.”

Citigroup denied speculation it might be nationalized, CNBC television reported. A bank spokesman declined to comment.

“Developments in the banking system are a reflection of the sustained and considerable headwinds facing balance sheets due to legacy assets and the further deterioration in economic conditions,” said Mohamed El-Erian, chief executive of Pacific Investment Management Co, also known as Pimco.


Analysts said the government would like to avoid a repeat of the downfall of Lehman Brothers Holdings Inc, whose September 15 bankruptcy was viewed as a key trigger in the broad downturn in world economies and equity markets.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp, told reporters in New York that she would be “very surprised” if any large U.S. bank were nationalized, and that her agency had sufficient reserves to cover bank failures. Analysts expect hundreds of such failures this year and next.

Some positive news came Thursday from JPMorgan Chase & Co. The No. 2 U.S. bank reported a 76 percent decline in quarterly profit but still topped some analysts’ expectations.

However, the bank boosted its estimate of potential losses from credit cards and from Washington Mutual Inc, which it took over last September. Bank of America and Citigroup are JPMorgan’s main credit card rivals.

Bank of America shares closed down $1.88, or 18.4 percent, at $8.32, after falling to their lowest level in more than 17 years. Citigroup fell 70 cents, or 15.5 percent, to $3.83. JPMorgan closed down $1.57, or 6.1 percent, at $24.34.

The 24-member KBW Bank Index slid 8 percent, including a 26 percent drop at Marshall & Ilsley Corp. That Milwaukee regional bank said soured loans to residential developers, including ones in Arizona and Florida, led to a surprise quarterly loss.

Lawmakers expressed concern about the industry’s fragility.

“They’ll be back for more money” from TARP, said Sen. Bob Corker, a Tennessee Republican. “Our banking system is going to lose hundreds of billions of dollars,” and taxpayer money is “going down the drain,” he said.


Bank of America’s need for government help raised questions about whether CEO Kenneth Lewis overreached by buying Merrill for about $19.4 billion, and Countrywide Financial Corp, the largest U.S. mortgage lender, for $2.5 billion in July. Neither purchase involved government help.

The purchases extended Bank of America’s tentacles throughout the financial system in a period of pronounced economic weakness. The bank now looks more like the “financial supermarket” that Citigroup had sought to be.

When the transactions were announced, Lewis was hailed as a savior for a troubled banking industry. Many analysts now expect Bank of America to lower its quarterly dividend again, after halving it in October.

“This looks, feels and smells like a redux of Lehman,” said Tom Sowanick, chief investment officer of Clearbrook Financial LLC in Princeton, New Jersey.

The Financial Times said Lewis sent lawyers to examine Merrill’s books to determine if results worsened so materially that he could invoke a contractual right to scrap the merger.

Meanwhile, Citigroup CEO Vikram Pandit is expected to shrink the bank by about one-third.

Citigroup lost $20.3 billion in the year ended September 30. In its second TARP injection, the government agreed to cap losses on a $306 billion portfolio of troubled Citigroup assets.

But investors worry that any recovery plan will dilute shareholders’ stakes or not go far enough.

“There is no faith in Bank of America and Citi,” said Todd Leone, head of listed trading at Cowen & Co in New York.

Despite being considered healthier, JPMorgan’s credit rating was downgraded on Thursday by Moody’s Investors Service, which cited “the poor prospect” of the bank being able to generate capital. “Consecutive quarterly losses in the next twelve to fifteen months cannot be ruled out,” Moody’s said.

Reporting by Jennifer Ablan, Rodrigo Campos, Elinor Comlay, Carmel Crimmins, Andras Gergely, Joseph A. Giannone, Poornima Gupta, Juan Lagorio, Charles Mikolajczak, Jonathan Spicer, Jonathan Stempel, Julie Vorman, Dan Wilchins, Karey Wutkowski and Al Yoon; editing by John Wallace and Jeffrey Benkoe

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