BofA, Citi Shares Plunge on Nationalization Fears

Bank of America and Citigroup shares plummeted for a sixth straight day Friday, hammered by fears the U.S. government could nationalize the banks, wiping out shareholders.

Bank of America shares were down almost 20 percent in afternoon trading after touching their lowest level since 1984, while Citigroup shares fell over 20 percent after earlier reaching their lowest price since 1991. Both stocks have lost more than 90 percent of their value in the last year.

Citigroup's market capitalization shrank to $11.5 billion, making it worth less than asset administrator Northern Trust . Bank of America is now worth $21 billion, less than it paid for Merrill Lynch less than two months ago.

"Right now, people are looking at the worst-case scenario, which is either a complete nationalization, or Bank of America and Citi having to raise so much common equity that they dilute shareholders. It seems to me either one is a possibility,'' said Keith Davis, a research analyst at Farr, Miller & Washington.

The KBW Financial index was down 6 percent at 20.51 in afternoon trading, with Wells Fargo sliding almost 17 percent, and J.P.Morgan Chase down over 5 percent.

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Asked to comment on the rumors, Citigroup spokesman Jon Diat said in an emailed statement that the bank's capital base is "very strong'' and its Tier-1 capital ratio is "among the highest in the industry.''

In addition, people close to Citigroup said the third largest U.S. bank by assets had not had conversations with the government about nationalization.

Bank of America, the largest U.S. bank by assets, said in a statement that it saw no reason to nationalize "a bank that is profitable, well capitalized and actively lending.''

Washington officials have told Chief Executive Kenneth Lewis nationalization is not an option for the bank, Lewis said at a meeting with senior executives Thursday, according to a person familiar with the situation.

Last month, Bank of America posted its first quarterly loss in 17 years, after mounting losses at Merrill Lynch. Citigroup has lost $28.5 billion in the last 15 months, hammered by bad debts and toxic assets.

Each bank has already received $45 billion in government aid in recent months and a backstop on losses on toxic assets.

The aid exceeds the banks' current market value.

"We are still in the middle of a severe banking and financial market crisis—and it's getting worse,'' said Nouriel Roubini, a prominent New York University economist who forecast much of the credit and housing recession.

'Stress Test' Due

In coming weeks, the U.S. Treasury is expected to subject up to 25 banks, with assets exceeding $100 billion each, to a ''stress tests'' to decide which need additional capital.

If President Barack Obama, a Democrat, is inclined to take control of troubled banks—and the bank rescue plan outlined by Treasury Secretary Timothy Geithner leaves that question unanswered—he would be taking a political gamble in a country that is showing signs of "bailout fatigue.''

Nell Redmond / AP A Bank of America branch.

But support for such a move seems to be growing, even among some Republicans. Republican Sen. Lindsey Graham, considered one of the Senate's more conservative members, said recently that nationalization could be an option and former Federal Reserve Chairman Alan Greenspan has said government intervention could be the least bad alternative left.

French Economy Minister Christine Lagarde said in New York that there is nothing wrong with nationalizing financial institutions that have "defaulted and failed'' and added that world leaders are committed to preventing another failure of a major bank as happened to Lehman Brothers.

Lehman Brothers' September bankruptcy filing helped trigger a meltdown at American International Group Inc that essentially nationalized the giant insurer and is widely believed to have helped worsen the stock market's tailspin last fall.

"It's maybe 50/50 that we witness nationalization of certain of these large financial companies on the horizon. The markets are telling us that their fundamental conditions suggest they are under massive capital distress,'' said Keith Wirtz, president of Fifth Third Asset Management.

Last July, the former Bush administration and the Federal Reserve effectively nationalized mortgage finance companies Fannie Mae and Freddie Mac in a bid to back the U.S. housing market.

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Citigroup's bonds weakened after bank analyst Meredith Whitney said on CNBC she would be a seller of the company's stock.

The bank plans to sell its stake in Brazilian credit card company Redecard, sources with direct knowledge of the plans said Friday, potentially raising 3.05 billion reais ($1.27 billion) for the U.S. banking giant.

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