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 US 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 US$90 billion into them and promised to limit losses on more than US$400 billion of their total troubled assets.
Bank of America’s market capitalization at the weekend dropped to US$24.23 billion, while that of Citigroup to dropped US$10.63 billion — much less than the US$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.”
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 said.
“They’re pursuing a banking policy that makes nationalization inevitable,” said Peter Morici, a business expert at the University of Maryland. “The administration says it doesn’t want to nationalize the banks but it’s making such an outcome inevitable by its inept tending of the crisis.”
“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,” Morici said.
US 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.
“Once you tell the market if people can meet certain criteria they are going to get money, you are basically telling everyone that the prospect of bankruptcy or the prospect of the IndyMac situation had been heightened dramatically and therefore, we don’t know who the winners and losers are, so we sell everything,” Andrew Busch of BMO Capital Markets said.