BofA and Citi fears rattle markets

Fears that Citigroup and Bank of America would be nationalised shook global markets on Friday, prompting the Obama administration to reaffirm its commitment to private ownership of financial institutions.

“This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government,� said Robert Gibbs, White House press secretary. “That’s been our belief for quite some time, and we continue to have that.�

A Treasury spokesman said: “There are a lot of rumours in the market...but you should not regard these as any indication of the policy of this administration.� However, officials stopped short of ruling out nationalisation in all circumstances.

Chris Dodd, chairman of the Senate banking committee, earlier stirred speculation about nationalisation by telling Bloombergtelevision television: “I’m concerned that we may end up having to do that, at least for a short time.�

Wall Street executives told the Financial Times that the federal government would begin its “stress tests� of banks’ health as early as next week. This could expose further need for capital.

Citi and BofA have been pressing regulators and officials to explicitly rule out nationalisation. As reported in on Friday’s FT, Citi has floated a plan allowing it to raise equity without full nationalisation through conversion of about $75bn of preferred shares held by the government and other investors. But people close to Citi said the Treasury had so far failed to engage in concrete discussions.

Citi fell 22.3 per cent to $1.95, bringing its losses this week to nearly 44 per cent and reducing its market value to $10.6bn. Bank of America fell another 3.6 per cent to $3.79, giving it a loss of 33.6 per cent this week. At one point BofA was down more than 35 per cent, before rallying on the White House statement. The S and P 500 closed 1.1 per cent lower.

Gold prices were pushed beyond $1,000 a troy ounce during the day. “It is all fear-driven of one kind or another,� said Jay Mueller, senior portfolio manager at Wells Capital Management.