Governments on both sides of the Atlantic moved to tighten their grip over banks on Friday to stem a financial crisis that has pushed the U.S. economy into its deepest contraction in more than a quarter century.
U.S. stocks sank to a 12-year low after Washington struck a deal in which it could end up with more than a third of crisis-hit Citigroup. The World Bank and other development banks launched a $32 billion lending plan to help east European banks and businesses survive a deepening recession.
Citigroup shares tumbled some 30 percent after the U.S. Treasury struck a deal to convert $25 billion of its preferred stock to common shares, which could give it a stake of up to 36 percent in the bank by diluting existing investors.
While the government will not add to the $45 billion it has already invested in what was once the world's largest bank, the stock conversion will shore up the most conservative gauge of the bank's health.
The U.S. government is struggling to shore up its banks as part of its approach to restoring growth. Data showed the U.S. economy shrank a staggering 6.2 percent in the last three months of 2008, its biggest slide since the first quarter of 1982, as exports fell and consumers cut spending.
The fear is the government having a big stake in the company will create obstacles for Citigroup to be competitive, and there remain questions about the viability of the financial system, said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York.
The (gross domestic product) number, he added, just threw gasoline on the fire.
Across the Atlantic, investors were eyeing Lloyd's Banking Group as the second major British financial firm lining up to tap a government-backed insurance scheme.
The bank, which revealed a 10 billion pound ($14.28 billion) loss for 2008, said it had not finalized a plan yet but said talks with the UK government were well advanced.
On Thursday, Britain agreed to insure 500 billion pounds ($715 billion) of risky bank assets and struck a deal that could raise the government holding in Royal Bank of Scotland to 95 percent.
Global development banks also launched a two-year plan to lend up to 25 billion euros to shore up troubled banks and businesses in eastern and central Europe.
The crisis has dried up credit and capital flows into the once-booming region, pressuring exchange rates and forcing some countries to seek help from the International Monetary Fund.
Fannie Mae, the government-controlled company seen by the U.S. administration as a key conduit to stabilize the housing market, reported a $25.2 billion fourth-quarter loss, forcing it to ask for $15.2 billion from the U.S. Treasury.
Washington may also agree to finance the purchase of some of insurance company American International Group's businesses, a person familiar with the matter said on Thursday.
Together with the $1.75 trillion budget deficit forecast by U.S. President Barack Obama, the deals highlight the lengths to which governments are prepared to go to rescue the financial industry and the broader economy.
There's a feeling the banks might need yet more capital, and nationalization is back on the agenda both here and in the U.S. It looks as if there's no end in sight, said Graham Exton, fund manager at the UK's Tilney Investment Management.
STOCKS SWOON, ECONOMIES STAGGER
U.S. stocks fell to the lowest level since 1997 and European stocks slipped toward six-year lows registered earlier this week, while economic data showed economies faltering from Japan to Sweden.
Japanese factory output fell a record 10 percent in January, dragging down the number of new jobs on offer as Japan's recession appeared to be deepening.
India's economy slowed more than expected from October to December, while fourth-quarter data from the Nordic region showed the Danish and Swedish economies contracting at record paces and Finland entering recession.
The South Korean won fell to an 11-year low against the dollar as analysts said risk aversion fed by the fragility of global financial system would impede any recovery.
China also sent mixed signals on its economy, with one official saying he was confident the government could engineer 8 percent growth, but another saying growth would not pick up until at least the second quarter.
On Thursday, U.S. carmaker General Motors posted a 2008 loss of nearly $31 billion and said auditors were likely to cast doubt on its viability.
(Additional reporting by Tetsushi Kajimoto in Tokyo, Niklas Pollard in Stochholm and Deepa Seetharaman in New York; editing by Tom Hals)