/ 22 February 2009

Will US move to nationalise banks?

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 nationalisation.

Despite repeated assurances by 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 $90-billion into them and promised to limit losses on more than $400-billion of their total troubled assets.

Bank of America’s market capitalisation at the weekend dropped to $24,23-billion while that of Citigroup to $10,63-billion — much less than the $45-billion taxpayer-funded capital received by each of them.

“The two banks are implicitly nationalised, 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 nationalisation is in the cards, which will allow, when things improve, the government to exit without having
lost enormous sums,” he said.

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 say.

“They’re pursuing a banking policy that makes nationalisation inevitable,” said Peter Morici, a business expert at the University of Maryland.

“The administration says it doesn’t want to nationalise the banks but it’s making such an outcome inevitable by its inept tending of the crisis,” he said.

“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.”

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,” said Andrew Busch of BMO Capital Markets.

Last year, California-based mortgage lender IndyMac was declared bankrupt and taken over after a run triggered by excessive speculation over the bank’s soundness.

Since Geithner’s announced plan to pump more capital into banks and try to jumpstart credit markets about two weeks ago, financial stocks have been hammered down.

In Wall Street’s broad S&P stock index, “almost everyday it’s financial that is down 5% to 7% while the rest of the market is most down 2% or 2,5%,” said Busch.

Geithner appears to be wrestling with a key problem — how to transfer the “toxic” assets off bank balance sheets on to a platform which can be re-priced, repackaged, and sold to private investors at an appropriate price, said Frederic Dickson, chief market strategist at DA Davidson.

“Until this problem is solved, we will continue reading about structural problems in the banking system, the possibility of nationalisation of some banks, and the slow flow of needed liquidity through the banks to Main Street,” he said.

As bank shares dived on Friday, White House and the Treasury officials moved to dispel rumours of nationalization but market concerns persist on the impact of any deeper government role in the banking system.

“Continued speculation of further government involvement is inhibiting private capital investment and unnecessarily eroding consumer confidence in our nation’s banking system,” said Edward Yingling, president of the American Bankers Association.

“We believe that the whole discussion about nationalisation is impairing the financial sector and making the credit situation worse,” he said. – AFP