Hopes that the global banking crisis was past its worst were dashed yesterday when Bank of America was forced to accept $138bn (£94bn) of government support and Citigroup unveiled new losses of $8.3bn.
The US announcements led another day of turmoil in the international financial sector, with Barclays' shares plunging 25 per cent in the last hour of trading on the London Stock Exchange.
Bank of America, the biggest US lender by assets, posted a $1.79bn loss for the last three months of 2008 – its first quarterly loss since 1991 – and slashed its dividend to one cent. The bank was forced to seek government support to prop up its acquisition of Merrill Lynch, which suffered a record $15.3bn quarterly loss.
The federal government will inject $20bn into Bank of America in return for preferred stock paying a coupon of 8 per cent. The government will also guarantee $118bn of assets to ease the strain of absorbing Merrill's battered balance sheet.
Citigroup, another stricken US banking giant, posted a bigger-than-expected fourth-quarter loss and said it would split itself in two to shelter its key businesses from risky operations.
Bank of America was relatively unscathed by the financial crisis before the acquisition-hungry bank agreed to buy Washington Mutual and Merrill last year in what it believed were cheap deals. Merrill suffered massive losses in December, prompting Bank of America to consider calling the deal off, but the government insisted it must go through and offered assistance.
"The loss materialised late in the quarter and presented us with a decision," Ken Lewis, the chief executive of Bank of America, said. "We went to our regulators and told them we could not close the deal without their assistance. We believe those actions [by the government] were in the best interests of Bank of America and the financial system by limiting the downside."
The losses and government bailout will put extra pressure on Mr Lewis, who said in late 2007 that he had had "all the fun I can stand" in investment banking but then changed course by acquiring Merrill in the wake of the Lehman Brothers bankruptcy.
Bank of America wrote off $5.5bn of loans in the final quarter and took a bad-debt provision of $8.5bn, with "market-disruption" hits of $4.6bn. Merrill's losses included $1.9bn of writedowns on leveraged loans, $1.2bn on investment securities and $1.1bn on commercial property.
Citi's chief executive, Vikram Pandit, announced plans to break up the empire created by Sandy Weill by separating the conglomerate's core commercial banking business from its brokerage and asset management divisions. The bank announced its fifth straight quarterly loss, with Mr Pandit blaming the results on "unprecedented dislocation in capital markets and a weak economy".
Investors had hoped that Government bailouts at the end of last year had stabilised the banking sector after more than a year of massive writedowns on toxic debts. But the World Economic Forum warned last week that more asset falls, both in credit markets and ordinary loans to customers, would make this year just as painful for lenders as they pay the price of the global debt binge.
Some analysts in the US now believe that Citi and possibly Bank of America may have to be nationalised to draw a line under their woes. Ireland announced the nationalisation of Anglo Irish Bank late on Thursday to stop a run on its deposits and shares.
Bank of America shares shed 13.7 per cent in New York yesterday, and have lost nearly half their value this year. Citi shares fell 8.6 per cent.
Jitters about the banking industry spread to Britain's lenders yesterday afternoon as speculation mounted about the Government's plans for supporting the sector. New guarantees on mortgage bonds and other securities could be announced as early as next week, but the market was hoping the authorities would set up a "bad bank" to take illiquid assets off lenders' books. That idea is said to have dropped down the Government's list of priorities because of the complexity involved in valuing the assets.
A meeting between the banks and the Treasury, scheduled for last night, was called off, suggesting that the Government is taking longer to come up with its plans than expected. But bank executives were said to be on alert for weekend meetings with the Treasury.
Barclays was the biggest faller in the FTSE 100, losing a quarter of its value in late trading as rumours swirled that the bank, which has resisted taking state funding, had applied to the Treasury for a capital injection, or that one of its top directors had quit. The slump in the shares, which closed near a 15-year low, forced Barclays to issue a statement after the market closed saying it knew of no reason for the drop.
The bank's plunge coincided with the lifting of the Financial Services Authority's ban on short-selling financial stocks. Barclays, without the explicit backing of the Government, would have been more vulnerable to rumours spread by short sellers hoping to drive the bank's shares down.
Industry sources suggested that even without the end of the shorting ban the sector may have been hit by a combination of bad news from the US and uncertainty about the Government's plans, prompting investors to close long positions in anticipation of a potentially dilutive new bailout plan.