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.