Citi, BofA Get a Reprieve

Posted by: Ben Levisohn on February 20, 2009

With the Dow Jones industrial average off nearly 300 points over fears of bank nationalization, Treasury Secretary Timothy Geithner, like his counterparts in the FDIC, rushed in on a Friday to rescue beleaguered financial institutions – at least for one day. Unlike the FDIC, which seizes a bank on Friday and has it ready to open on Monday, the White House sought to avoid that scenario with a mid-day announcement that it would release details of its financial rescue plan next week — and nationalization would not be part of the plan.

The announcement worked. The Dow Jones Industrial Average and S&P 500, both down over 3% at the time, fought their way back to unchanged before giving back some of the rally to close down around 1% for the day.

It’s déjà vu all over again. Back in November, only a Federal Reserve pledge to support the banks prevented the stock market from trading much below its 10-year low and the market rallied 25%. Now, as the S&P 500 approaches those lows again – it traded as low as 754 on February 20, just two points above its 752 close on November 20 – investors hope to see some radical solution from the Treasury Department and the Federal Reserve. If they’re disappointed, expect the market to test those lows.

But this is really about banks and two banks in particular: Citigroup and Bank of America. Citi closed down 22% on Friday, while Bank of America was down around 4%. Citi and B of A can talk all they want about having adequate capital, but if it weren’t for the sheer size of the two financial behemoths – and the worries about the knock-on effects their demise would have on the financial system - the banks would have been seized and sold off months ago.

The hope that the feds will figure out some way out of this mess without wiping out shareholders is the only force keeping BofA and Citi’s shares aloft. But Geithner is no Luke Skywalker — and Bernanke no Ben Kenobi. The ending to this saga may not be pretty.

Reader Comments

John

February 20, 2009 8:21 PM

Now, the real question is: who is Darth Vader?

Pissy

February 20, 2009 8:22 PM

Let em all die, we can then have other smaller banks take over. They are too big and we should let them die like Bear and Lehman.

DOSman

February 20, 2009 8:24 PM

With no Skywalker or Kenobi, let's hope the FORCE is with Geithner and Bernanke. Else all the Kings men will watch the demise of an economic strength from yesteryear, that may never recover! With it, all the nations of the world will be telling their children stories for many years to come, of a Country that came, presented much beauty, knowledge, good and evil as a standard of life, then faded away as a vapor of memories.

Too Bad

February 20, 2009 8:36 PM

We need a Darth Vader to Chop up Sh*tybank & Bank of Clownmerica and distribute them to the "Stress Test" winning banks that have the best interests of American Taxpayers!!!!! Don't Ever give up those Preferred shares America!!!!!!!!

SHAUNT MAKARIAN

February 20, 2009 8:36 PM

I'm sick of supporting failure! I want a bailout give me one billion dollars and I'll stimulate the economy!

Kay & Marian

February 20, 2009 9:54 PM

What will the stock holders get if nationalization takes place?
Why is it more detail about this nationalization explained to the public?
Is it just 2 banks involved?
Will the stock holders ever get something back in the future years?
When they say Bank of America is that savings, stocks,checking get nationalized?
Thank You.

lionel

February 22, 2009 9:33 AM

Things could be difference when card deffaults surface, bonds maturity in months, world's confidence hit again, protectionism arise, Decision that never make has be done. Hold for few more months for BoA & Citi.

You are incompetent

February 22, 2009 8:45 PM

"...but if it weren’t for the sheer size of the two financial behemoths – and the worries about the knock-on effects their demise would have on the financial system - the banks would have been seized and sold off months ago"

That's what you wrote about Bank of America. You actually thought that up and then typed it out.

Now here is what I will say about BOA: BOA was founded by alien agents from the planet Zork as part of a conspiracy in prelude to a full on invasion of Earth. Ken Lewis is a Zorkian high priest in disguise.

There you go: anyone can make up and print anything they want about BOA without regard to facts or truth, ust as you have done.

"Bank of America would have been seized and sold off months ago". You thought that up, typed it out and released it thinking that no one would call you out on it.

Sold off months ago?

February 22, 2009 8:51 PM

Ben Levisohn: when you wrote that BOA would have been seized and sold off months ago, were you aware that you were discussing a bank that had reported earnings of around 5-6 billion YTD in the time frame you are speaking of?

Did you do any fact checking for this article?

The Mad Hedge Fund Trader

March 3, 2009 10:49 AM

So nationalize the banks already! Get it over with! Call it whatever you want: partial nationalization, temporary nationalization, socialization, liverwurst, or rutabaga. Just get it over with! This tortuous slow drip of on again, off again, stop gap measures is going to cost us more than if we executed the politically incorrect “N” word. Of course, a government takeover is the worst nightmare for many Republicans. But now that former Fed governor Alan Greenspan and many fiscal conservatives are on board, this shouldn’t amount to political suicide for Obama. The FDIC’s Sheila Bair already does this on an almost daily basis with smaller regional banks, like Washington Mutual, but for some reason the top nine “too big to fail” banks are sacrosanct. Their deposits have been effectively nationalized with government guarantees since last fall. The market is already selling us that many of these once hallowed institutions are now worthless. This is what Citigroup (C) at $1 and Bank of America (BAC) at $2 are telling us. Just wipe out the pitifully little the common shareholders have left, clean them up, and resell them in five years after the credit markets are restored. Every government that ever did this, like the UK in the eighties and Hong Kong in 1998, made a fortune. I was involved with both, and serious coin was made by the sellers and the buyers. Not to drive a stake through the hearts of these de facto “zombie” banks really would risk a Great Depression II and an “L” shaped lost decade. The markets would love decisive and surgical action like this and rocket.

Post a comment

 

About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

BW Mall - Sponsored Links

Buy a link now!