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.
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