US bank shares near 17-year lows

US bank shares near 17-year lows

By Francesco Guerrera and Aline van Duyn in New York and Krishna Guha in Washington

Published: February 20 2009 01:03

US bank shares hit a near 17-year low on Thursday on rising fears the government will have to nationalise troubled institutions such as Citigroup and Bank of America, wiping out investors and taking control of a large portion of the financial sector.

Bank of America shares slid 14 per cent to $3.93, their lowest point since 1984. Shares in Citi were down 13.8 per cent, closing at $2.51, their lowest since 1991. The KBW banks index fell to its lowest level since 1992. In the debt markets, Citi’s bonds were trading at distressed levels.

People close to the situation said that some banks were in talks with regulators over plans that would provide them with another capital injection but stopped short of an outright nationalisation.

One option being discussed – at least for Citi – would be to convert some or all of the government’s $45bn holding of preferred shares, as well as the $35bn in preferred shares held by sovereign wealth funds and other investors, into common stock.

The move, which could be coupled with an offering at a discount to the share price, would give Citi much-needed support and fresh capital without forcing it into state ownership. However, it is unclear whether the government would accept such a plan.

The US authorities want to complete their planned “stress tests” of the bank’s financial health before deciding how to treat individual institutions.

The Treasury expects that the tests will indicate most US banks remain viable today although they could potentially be vulnerable in stress scenarios. The government would support such banks by buying convertible preferred stock. However, the authorities also envisage the possibility that stress tests will reveal that some banks are so weak that they would have to be nationalised through the Federal Deposit Insurance Corporation.

The question is whether Citi can persuade the authorities to treat it in the first category rather than the second. Citi was not available for comment.

Other banks were also hit hard on Thursday. Shares in Wells Fargo closed down 8 per cent at $12.01 – its lowest level in a decade. JPMorgan fell a further 4.2 per cent on Thursday to $20.60.

Goldman Sachs bucked the trend, ending 1.5 per cent higher at $10.06.

Additional reporting by Nicole Bullock, Henny Sender and Greg Farrell in New York