U.S. Seeks to Stem Bank Fears

By DAMIAN PALETTA, DAVID ENRICH and DAN FITZPATRICK The White House tried to knock down speculation that the government is preparing to nationalize several large U.S. banks, but some bankers complained that the Obama administration needs to act even more aggressively to shore up confidence in battered financial institutions. Robert Gibbs, a White House spokesman, said Friday afternoon that the month-old Obama administration "continues to strongly believe that a privately held banking system is the correct way to go." The comments reversed a broader decline by U.S. stocks that at one point pushed the Dow Jones Industrial Average close to 1997 levels. Still, the Dow finished down 100.28 points, or 1.3%, to 7365.67, a new low for the current bear market. Friday's decline left the Dow with its worst weekly drop in four months. In another sign of flagging investor confidence, gold topped $1,000 an ounce Friday, its highest price in nearly a year. Among banks with huge exposure to souring loans and the recession, Citigroup Inc. tumbled 22%, while Bank of America Corp. slipped 3.6%. Friday's slide subtracted 4.9% from the combined capitalization of the eight financial institutions that were the first to get capital infusions from the government. Among them, Wells Fargo & Co. fell 9.2%, and J.P. Morgan Chase & Co. was down 3.4%. The broad declines show that investors are struggling to sort out the impact of the government's moves already to expand its role in the banking system. Those steps include owning preferred stakes that now exceed the value of all the privately held common shares in some banks. Federal officials are weighing whether to change their ownership into securities that could be converted to common stock, essentially giving the government control of some of the nation's largest financial institutions. Friday's tumult underscored deepening worries that months of unprecedented efforts by the Bush and Obama administrations to backstop nearly every corner of the U.S. banking system may not be enough to prevent the nationalization of some of the most wounded institutions. More Memo from Bank of America's Ken LewisTop government officials remain highly resistant to the idea of nationalizing banks, fearing that it could prolong or even worsen the financial crisis. In addition, some Obama administration officials believe the government wouldn't be able to sufficiently manage nationalized banks. A federal takeover of even a few institutions also could make it harder to attract private capital, since such investors would worry that the government might eventually dilute or wipe out their stakes. But the White House's insistence that it isn't interested in nationalizing beleaguered banks continues to be muddied by talk in Washington that the move might be inevitable. Friday's swoon in financial stocks was fueled by Senate Banking Committee Chairman Christopher Dodd (D., Conn.), who said on Bloomberg Television that he is "concerned we may end up having to do that, at least for a short time." Just two weeks ago, Sen. Dodd publicly dismissed speculation that the U.S. could soon nationalize Bank of America. The Charlotte, N.C., bank now has a stock-market capitalization of $19.02 billion, or less than half of the $45 billion in taxpayer-funded capital received by Bank of America since October. Increasingly Exasperated Inside Citigroup, bank executives are growing increasingly exasperated with what they view as the Obama administration's failure to state even more explicitly that nationalization isn't imminent and that "stress tests" announced as part of the latest financial-rescue package aren't a guise for government takeovers that likely would make their common shares worthless. The tests, expected to begin next week, will be required for any bank with more than $100 billion in deposits. Government takeovers likely would make common shares of those banks worthless. "They've got to make a statement against nationalization," said one person familiar with Citigroup's thinking. The Obama administration's rhetoric so far amounts to "destructive ambiguity," this person said. In a statement Friday afternoon, Citigroup said its capital base remains "very strong." "We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth," the New York company added. Kenneth Lewis, the chairman and chief executive of Bank of America, insisted in a memo to employees that there is no need to nationalize the bank. "We see no reason why a company that is profitable with strong levels of capital and liquidity and that continues to lend actively should be considered for nationalization," Mr. Lewis said. "Speculation about nationalization is based on a lack of understanding of our bank's financial position as well as a lack of appreciation for the adverse ramifications for our customers and the economy." No More Help Mr. Lewis added that Bank of America "does not need any further assistance today" and likely "will not need any further assistance in the future. I believe our company has more than enough capital, liquidity and earnings power to make it through this downturn on our own from here on out." In recent days, Bank of America executives have been prodding administration officials to do something to bolster flagging confidence in U.S. financial institutions. "I think the banks have strenuously told the administration they are letting events get beyond them and they need to come out and make a definitive statement," said a person close to the bank. The White House's comments appeared to mollify Bank of America. "I would say it's a very significant statement and an important clarification about the administration's policy direction," spokesman James Mahoney said. One huge challenge for the Obama administration is that its assurances are colliding with rising unemployment, costly home foreclosures, tight credit markets and the steep drop in consumer spending. The U.S. banking industry is expected to record a quarterly loss in the fourth quarter for the first time since 1990. The financial conditions of many banks are continuing to weaken, especially at those with large portfolios of credit-card loans and commercial real-estate loans that are being hit increasingly hard by the recession. Even private-equity investors, well-known for scooping up assets that are considered to be undervalued, are wary about pouring money into the sector due to ongoing uncertainty about the government's role in financial institutions. "There has to be some level of stability and confidence in what the playing field is going to look like in order to make a reasonable investment decision," says John Stein, president of FSI Group Inc., which invests in small financial-services companies. Treasury Secretary Timothy Geithner recently announced plans to pump more capital into banks and try to jumpstart credit markets, but government officials haven't quelled fears about the state of the banking sector. Analysts expect that roughly 1,000 banks might fail over the next three to five years. As a practical matter, Citigroup's vast international scope would further complicate any U.S. government nationalization scheme. In Mexico, for example, where Citigroup controls the nation's No. 2 bank by assets, a law restricts outside governments from owning more than 10% of a domestic bank. Achilles Heel While plunging bank-stock prices are putting more pressure on the Obama administration, they don't have a direct impact on a bank's overall financial health. A bank's Achilles heel is deposits, and any exodus would trigger a funding crisis that forces the government to take drastic action, possibly by seizing the bank. Increased deposit-insurance limits by the Federal Deposit Insurance Corp. have soothed some jitters among bank customers, but the heightened specter of nationalization could cause some to flee just to avoid the possibility of hassles in the case of a government takeover. Citigroup executives on Friday were closely monitoring the bank's liquidity position, but officials said they hadn't detected any alarming outflows. At Bank of America, deposit balances are up "significantly" so far this year, a spokesman said. —Robin Sidel, Sudeep Reddy and Deborah Solomon contributed to this article. Write to Damian Paletta at damian.paletta@wsj.com, David Enrich at david.enrich@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com