The Obama administration is promising to flesh out its plan to repair the US banking system this week as investors and Wall Street executives express concerns about the creeping nationalisation of their industry.
With the US stock market sliding towards levels not seen in more than a decade, the Treasury hopes to lift some of the uncertainty with details on how to clear up the toxic assets clogging bank balance sheets and to “stress test” the solvency of the nation’s biggest financial institutions.
Confirmation that Tim Geithner, the Treasury Secretary, would make a statement in the coming week helped staunch stock market selling late on Friday, but it remains unclear exactly when an announcement will come or whether the administration had only been bounced into the new deadline because of the market’s gyrations.
Citigroup shares have plunged below $2 for the first time since 1991. Bank of America’s stock also plunged on Friday, until chief executive Ken Lewis furiously attacked those who thought it could be taken over by the government. “Speculation about nationalisation 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,” he said. “Bank of America does not need any further assistance today and I am confident we will not need any further assistance in the future.”
BofA has received two tranches of taxpayer money already, and has a $118bn (£82bn) government guarantee against a further $118bn of losses.
Citigroup has avoided collapse through two government infusions of its own, but it has been lobbying for a plan that will sweep toxic mortgage assets from bank balance sheets into a separate government-controlled “bad bank”, whose losses – if there are any – would be repaid when the industry has returned to profitability.
Executives at both banks, and across Wall Street, are angry that the Obama administration has been allowing speculation about nationalisation to run riot. In a frenzied week of trading, speculators have claimed that the “stress test” to be carried out on all $100bn-asset banks is a means to engineer the takeover of weak players. The price action in the financial markets suggested increasing expectations that not just ordinary shareholder but preferred shareholders, too, could be wiped out. Meanwhile, traders swapped video of a slip of the tongue by Federal Reserve chairman Ben Bernanke, speaking last week. He said that “whatever actions may need to be taken at one point or another, I think there’s a very strong commitment on the part of the administration to try to return banks – or keep banks private or return them to private hands as quickly as possible”.
The index of US financial stocks has tumbled since Mr Geithner’s botched announcement of the next phase of the Wall Street bailout two weeks ago – an announcement that was light on detail and did not answer vital questions about how to deal with toxic assets and to recapitalise the banking system without nationalising large parts of it.