Bank of America Corp and Citigroup Inc shares plummeted for the sixth straight day on Friday, hammered by fears the U.S. government could nationalize the banks, wiping out shareholders.
The shares came off their lows after the White House said President Barack Obama favored a privately held banking system, but investor concerns persisted.
If Obama is inclined to take control of troubled banks -- and the bank rescue plan outlined by Treasury Secretary Timothy Geithner leaves that question unanswered -- he would be taking a political gamble in a country that is showing signs of bailout fatigue.
Bank of America and Citigroup shares fell as much as 35 percent after Christopher Dodd, a Democrat who chairs the Senate Banking Committee, said it might be necessary for the government to take control of some banks.
Bank of America shares were down 4.8 percent at $3.75 in afternoon trading after touching their lowest level since 1984. Citigroup shares fell 17 percent to $2.09 after earlier reaching their lowest price since 1990.
Both stocks have lost more than 90 percent of their value in the last year.
Citigroup's market capitalization shrank to $11.4 billion, making it worth less than asset administrator Northern Trust Corp. Bank of America, the largest U.S. bank by assets, is now worth $19 billion, less than it paid for Merrill Lynch just seven weeks ago.
The values of the companies seems so ridiculously depressed because no one believes in their values, and no one believes in their values because they think the government is going to take them over, said Ken Crawford, senior portfolio manager at Argent Capital Management.
Crawford said the government could be forced to nationalize Citigroup and Bank of America if their share prices keep falling and their survival is at risk.
The KBW Financial index was down 7.3 percent at 20.24 in afternoon trading after hitting an all-time low of 19.58, with Wells Fargo Co sliding 20 percent to $9.60, its lowest level since 1996, and J.P.Morgan Chase & Co down 7.8 percent at $19.00.
Bank of America Chief Executive Kenneth Lewis said in a statement, 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.
Citigroup spokesman Jon Diat said in an emailed statement that the bank's capital base is very strong.
Last month, Bank of America posted its first quarterly loss in 17 years, after mounting losses at Merrill Lynch. Citigroup has lost $28.5 billion in the last 15 months, hammered by bad debts and toxic assets.
Each bank has already received $45 billion in government aid in recent months and a backstop on losses related to toxic values. The aid exceeds the banks' current market value.
We are still in the middle of a severe banking and financial market crisis -- and it's getting worse, said Nouriel Roubini, a prominent New York University economist who forecast much of the credit and housing recession.
The cost of insuring $10 million of Citigroup debt for five years rose to $475,000 annually from $405,000 on Thursday, according to data from Phoenix Partners Group.
The cost of insuring Bank of America debt rose to $275,000 a year from $245,000.
STRESS TEST DUE
In coming weeks, the U.S. Treasury is expected to subject up to 25 banks, with assets exceeding $100 billion each, to a stress tests to decide which need additional capital.
Sen. Dodd said it may be necessary to nationalize some banks for a short time, although the government was trying to avoid that action, according to an interview with Bloomberg.
But later White House spokesman Robert Gibbs said the Obama administration believed that a privately held banking system is the correct way to go.
Support for nationalization seems to be growing, even among some Republicans. Republican Sen. Lindsey Graham, considered one of the Senate's more conservative members, said recently that nationalization could be an option and former Federal Reserve Chairman Alan Greenspan has said government intervention could be the least bad alternative left.
French Economy Minister Christine Lagarde said in New York that there is nothing wrong with nationalizing financial institutions that have defaulted and failed and added that world leaders are committed to preventing another failure of a major bank as happened to Lehman Brothers.
Lehman Brothers' September bankruptcy filing helped trigger a meltdown at American International Group Inc that essentially nationalized the giant insurer and is widely believed to have helped worsen the stock market's tailspin last fall.
It's maybe 50/50 that we witness nationalization of certain of these large financial companies on the horizon. The markets are telling us that their fundamental conditions suggest they are under massive capital distress, said Keith Wirtz, president of Fifth Third Asset Management.
Last July, the former Bush administration and the Federal Reserve effectively nationalized mortgage finance companies Fannie Mae and Freddie Mac in a bid to back the U.S. housing market.
(Additional reporting by Sitaraman Shankar, Dominic Lau and Olesya Dmitracova in London; Peter Starck in Frankfurt and Elinor Comlay, Dan Wilchins and Jennifer Ablan in New York; Editing by Andre Grenon and John Wallace)