Shares of Bank of America Corp. and Citigroup Inc. tumbled to multiyear lows this morning on worries the banks are ill-prepared to handle soaring credit losses as the economy sinks.
Bank of America shares fell 21.4 percent and Citigroup shares fell 20.1 percent, as the Dow Jones industrial average fell more than 1.5 percent in late-morning trading.
“This looks, feels and smells like a redux of Lehman,” said Tom Sowanick, chief investment officer of Clearbrook Financial LLC in Princeton, N.J., referring to the September bankruptcy of Lehman Brothers Holdings Inc.
“Investors are betting that the government needs to step in, and that will wipe out the equity holder,” he said.
Bank of America, the largest U.S. bank, is seeking billions of dollars of government aid after it realized that credit losses at Merrill Lynch & Co., which it bought on Jan. 1, were much higher than expected, a person familiar with the matter said.
A spokesman for the bank declined to comment. Bank of America has already received $25 billion under the U.S. Treasury’s Troubled Asset Relief Program. The bank is scheduled to report its quarterly results on Jan. 20.
“Bank of America appears to be in meltdown,” said Anton Schutz, president of Mendon Capital Advisors in Rochester, New York, which owns the bank’s shares. “But what is the government going to do, and how big will it be? Everybody’s assuming the worst.”
Keith Davis, a bank analyst at Farr, Miller & Washington in Washington, expressed concern that Bank of America may have grown too fast, buying Merrill and the nation’s largest mortgage lender, Countrywide Financial Corp, since June.
“There’s an inability for people to unravel all the deals Bank of America has done,” he said. “Given their razor-thin capitalization levels, there’s a risk that credit losses continue to rise significantly, as well as writedowns.”
Meanwhile, Citigroup is expected to report its fifth straight multibillion-dollar quarterly loss on Friday and unveil changes to significantly shrink its balance sheet and business model.
The bank is under pressure even after having received $45 billion from the government.
“A spinoff (or a) good/bad bank move may require a considerable equity infusion, creating more dilution,” Merrill Lynch analyst Guy Moszkowski wrote. (Reuters)
