US looks at fresh bank investment after $26bn losses

US looks at fresh bank investment after $26bn losses
The US government is investigating new ways of addressing continued dislocation in the US banking sector, contemplating a second round of investment in the hope of reducing banks' exposures to "toxic" illiquid assets.

By James Quinn, Wall Street Correspondent

Last Updated: 11:35PM GMT 16 Jan 2009


Officials from within the Bush administration – in their final days ahead of President-elect Barack Obama's inauguration on Tuesday – are looking at a wide range of options to tackle the crisis in the country's major banks.
High on the list is understood to be a plan to roll out guarantees to back-stop further losses, the like of which have already been granted to Citigroup and Bank of America (BoA).
Another option would be to create some form of vehicle to remove assets from balance sheets once and for all, similar to outgoing Treasury Secretary Hank Paulson's original intention for the $700bn (£474bn) bank bail-out fund.
The discussions, which are understood to involve members of Obama's transition team, have been continuing for a number of weeks, as it has become increasingly clear that the problems in the banking sector have not been stopped by the $125bn round of capital injections into the country's nine major banks.
In addition to the impact the dislocation in the housing market has had on US banks' balance sheets, there is a growing threat from the deterioration in consumer credit, with car loans, unsecured personal loans and credit cards all showing signs of increasing default.
The problems within the US banking market were exemplified in the last few days by a batch of dismal financial results from some of the major banks, with heavy losses sending shares plummeting as concerns that 2009 may yet be as bad a year for financials as 2008 surfaced.
Shares in all the major banks fell yesterday, with BoA closing down 14pc, Citigroup off 9pc and JP Morgan Chase ending the day 6pc lower.
The falls came after Citigroup reported a post-tax loss of $8.29bn in the fourth quarter, its fifth consecutive loss, albeit within the $6bn-$10bn range analysts had been forecasting.
Alongside the results, chief executive Vikram Pandit outlined his plan to split the bank into two units;

• Citicorp, its core banking business with assets of $1,100bn; and


• Citi Holdings, which will essentially be made up of its troublesome brokerage and asset management business, with assets of $850bn.

Meanwhile, BoA continued to stumble, reporting its first loss since 1991, a quarterly post-tax loss of $2.39bn. This figure did not include Merrill Lynch's $15.31bn loss for the fourth quarter, because the purchase was only completed on January 1.
Nevertheless, Merrill's losses continue to weigh heavily on its new parent, which yesterday revealed it is to receive a fresh $20bn capital injection from the US Treasury and a guarantee from the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) back-stopping the losses on $118bn of Merrill's most toxic assets.
In return, the bank will have to issue $4bn of preferred shares yielding an 8pc coupon, as well as paying 8pc-a-year on the $20bn, issue further warrants and cut its dividend and place a cap on executive pay and bonuses.
BoA chairman Ken Lewis, who has come under fire for going ahead with the Merrill deal in spite of the dismal state of its finances, said that in December he looked into backing out of the deal, but that government officials told him to do so could create "serious systemic harm".

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4274591/US-looks-at-fresh-bank-investment-after-26bn-losses.html