Bank Nationalization - Could Two Top US Banks Become Government Controlled?
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Coming off new lows traded during last Friday's session, shares of Citigroup (C)
and Bank of America (BAC) were up during much of Monday's reading session as the
lingering sentiment of nationalization of the two banks still resonates throughout
the industry.
As investor confidence continues to wane throughout our country's financial sector,
one of the most logical, yet ill-received notions to save the two floundering
institutions would be to nationalize the banks. The act would definitely dissolve
all stakes of shareholders and turn control over to the government.
"This administration continues to strongly believe that a privately held banking
system is the correct way to go, ensuring that they are regulated sufficiently by
this government," acknowledged White House press secretary Robert Gibbs last week.
With little assurance from investors that the financial industry can right
themselves, the government has already stepped-in in the past to aid the struggling
firms during the current recession. Late last year, both banks received $45 billion
in capital to help shore up their books as they have taken massive losses over the
past year due to write-downs in the mortgage business.
In addition to the capital received, the banks have also been guaranteed protection
from the government for billions of dollars in bad investments and loans. However,
Citigroup, which has in the past
been one of the more profitable banks, has posted five consecutive quarterly losses
including the bank's pervious 4th quarter loss of $8.28 billion.
As part of the rescue agreement with the government, Citi sold more than $25
billion worth of preferred shares to the government, with Bank of America selling
$15 billion and an additional $10 billion after the bank purchased Merrill Lynch.
Over the next few months, the banks sold another $20 billion worth of shares to the
government to total the $45 billion received.
Even with the massive losses, Citi still maintains a solid capital base, and the
company's Tier 1 capital ratio, which measures the bank's ability to absorb bad
debt and losses, sits at nearly 12%, right near the top of the industry.
Nevertheless, with the company's stock trading at their lowest point in more than
20 years, bank officials are scoping out all possibilities for the company.
In fact, in a report by the Wall Street Journal early Monday morning, Citi
officials were debating the possibility of giving the government a higher stake
in the bank, upwards of a 40% share of the company. The government currently has a
nearly 25% stake in the bank. If the move goes through, the government would
convert their existing shares of preferred stock, previously received, into common
shares.
In a statement released Monday, by analyst Paul Miller of Friedman, Billings,
Ramsey & Co., the markets are "increasingly factoring in some sort of the
nationalization of the banking sector. We believe the quickest and lowest cost
solution is for the government to close down troubled financial institutions,
regardless of size, extract the toxic assets, and sell the good portions of these
financial institutions to private investors as quickly as possible."
The nation's regulators, which include the Treasury Dept., FDIC, the Federal
Reserve, Office of Thrift Supervision and the Office of Comptroller of the
Currency, revealed their intentions as to how they plan to go about helping with
the financial system. In a joint statement, the regulators confirmed that the
banking industry is still in need of additional assistance, but failed to name any
specific ones or provide any figures.
"A strong, resilient financial system is necessary to facilitate a broad and
sustainable economic recovery," the regulators stated. "The U.S. government stands
firmly behind the banking system during this period of financial strain to ensure
it will be able to perform its key function of providing credit to households and
businesses."
Moreover, the regulators went on to explain that "any government capital will be in
the form of mandatory convertible preferred shares, which would be converted into
common equity shares only as needed over time to keep banks in a well-capitalized
position and can be retired under improved financial conditions before the
conversion becomes mandatory."
With that said, shares of Citigroup and Bank of America recovered off their lows
of last week, to trade relatively higher heading into the close of Monday's
session. By late afternoon, shares of Citi were up more than 9%, adding $0.19 to
close at $2.14 per share. On Friday, Citi saw their shares fall to a yearly low of
$1.61 per share, before rebounding to close at $1.95 per share.
Shares of Bank of America were also
higher throughout Monday's trading, adding more than 3%, or $0.12, to close at
$3.91 per share. Friday's session was also dreadful for the company's stock,
falling to their lows of $2.53 per share, before bouncing back later in the day to
close at $3.79 per share.
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