Two of the biggest US banks reported multibillion-dollar losses on Friday hours after the US government unveiled $US20 billion ($30 billion) of additional aid for Bank of America in the latest toll of a raging credit crisis.
Bank of America posted its first quarterly loss in 17 years on the heels of the government’s midnight announcement that it would help the largest US bank absorb its purchase on Jan. 1 of troubled brokerage Merrill Lynch & Co.
The US Treasury will provide the new aid in exchange for preferred stock, and along with the Federal Reserve and Federal Deposit Insurance Corp, agreed to protect Bank of America from possible losses on almost $US100 billion of assets.
Also scrambling to survive huge new losses triggered by the credit crunch was No. 3 US bank Citigroup Inc, which unveiled plans to split in two and shed troubled assets.
The announcements came before a long holiday weekend that ends on Tuesday when President-elect Barack Obama will be sworn in. Obama again said that even with a wide range of measures to pull the United States out of recession, the US economy will likely worsen before it improves.
Treasury Secretary Henry Paulson, on his last full day in office, said a substantial portion of the second half of the government’s $US700 billion financial rescue fund should be reserved for bank capital programs.
Aid for automakers
The Treasury said it will lend Chrysler LLC’s finance arm $US1.5 billion to help it make new car loans as part of a broader program to revive the US auto industry.
The Treasury earlier extended a $US4 billion loan to Chrysler for its automotive operations and had granted $US13.4 billion in operating loans to General Motors Corp.
Shares in Bank of America and Citigroup rose in early trade after tumbling sharply on Thursday, as investors believe the government will not let the two banks fail.
But the size of the losses and need for fresh aid unsettled Wall Street. The two banks’ stocks fell and pulled down shares of their two large rivals, JPMorgan Chase & Co. and Wells Fargo & Co.
"Coming into 2009, we thought we had the big bailouts past us as far as the financials are concerned," said Matt McCall, president of Penn Financial Group in Ridgewood, New Jersey.
"Now it’s clear that there could be more big banks coming back to the well, asking the government for money," he said. "And when does this end and when do they say no? They just keep writing checks."
Fear of more bank losses spread to London, where shares in Barclays fell 25% and other bank stocks tumbled as worries about capital and write-downs resurfaced. Dealers said there was no single reason for their sharp slide.
After the market closed, Barclays reported it expects to report pre-tax year profit well ahead of analysts’ estimates of 5.3 billion pounds ($12 billion), and said it knows of no justification for the stock slide.
The Bank of England and Downing Street confirmed a meeting took place among Prime Minister Gordon Brown, the Bank of England governor, finance minister and securities regulator, but neither would comment on the talks.
British ministers aim to announce yet another bank lending package, a Treasury source told Reuters, while Ireland nationalized Anglo Irish Bank, its third-largest lender, to avoid a collapse.
BofA, Citi post huge losses
Citigroup, formerly the largest US bank, reported a fourth-quarter loss of $US8.29 billion and recorded $US28.3 billion of write-downs and credit losses. Over the past 15 months Citigroup has amassed an astounding $US92 billion in losses.
Merrill Lynch posted a record $US15.31 billion loss in the fourth quarter, while Bank of America reported a $US1.79 billion loss for the quarter.
"It is difficult to focus on what is going right at this time," said Kenneth Lewis, Bank of America’s chief executive.
Lewis sought help after it became clear Merrill’s credit losses were far higher than expected, having threatened last month to scrap the $US19.4 billion takeover without aid.
The news of massive new losses and more aid came after the US Senate on Thursday cleared the release of the remaining $US350 billion of emergency funds to tackle the crisis. The Bank of America aid will come from the first $US350 billion package.
With economies and credit markets worldwide yet to respond to massive bailouts and deep interest rate cuts, Bank of Japan Governor Masaaki Shirakawa said financial conditions in the world’s second-biggest economy were tightening rapidly.
Conditions in France were also on the slide. The Bank of France estimated the French economy contracted sharply in the fourth quarter and its monthly survey of business managers showed they expect the downturn to deepen.
The euro zone trade balance swung from a surplus to a deficit in November as exports plunged twice as much as imports, data showed, underlining the fast pace at which the region’s economy was sliding deeper into recession.
New US economic data raised the possibility of deflation. The pace of US inflation slowed to a half-century low last year and industrial output fell for the first time since 2002.
The reports suggested the economy could take longer to pull out of a downturn that is on track to be the longest and possibly deepest since World War Two.
"Deflation is just around the corner," said Meny Grauman, an economist at CIBC World Markets in Toronto.
"With the US economy roughly one full year into a deep recession, the prospect of deflation is a concern for another time, especially on a day when the US government has decided to inject billions more into the US banking system."