Shares of Bank of America Corp and Citigroup Inc plummeted for the sixth straight day on Friday, hammered by increasing fears that the U.S. government could take the control of the banks, wiping out shareholders.
Bank of America shares were down 6.6 percent to $3.66 in premarket trading, their lowest level since 1984, while Citigroup fell 12.3 percent to $2.20, their lowest price since 1991. The Frankfurt-listed shares of the banks also fell.
It's a clear sign that the markets are expecting a high probability of them being nationalized, said Mike Holland, founder of Holland & Co. The clear expectation is that shareholders would effectively be wiped out.
Citigroup spokesman Jon Diat said in an emailed statement that the bank's capital base is very strong and its Tier-1 capital ratio is among the highest in the industry.
Diat added, We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth.
Spokesmen for Bank of America in London declined to comment.
In coming weeks, the U.S. Treasury is expected to subject up to 25 banks, with assets exceeding $100 billion each, to stress tests to decide which need additional capital.
Support for nationalizing troubled banks seems to be growing. Republican Sen. Lindsey Graham, considered one of the more conservative members of the Senate, said nationalization could be an option, and former Federal Reserve Chairman Alan Greenspan said government intervention could be the least bad alternative left for policymakers.
Right now, people are looking at the worst-case scenario, which is either a complete nationalization or Bank of America and Citi having to raise so much common equity that they dilute shareholders. It seems to me either one is a possibility, said Keith Davis, a research analyst at Farr, Miller & Washington.
There's just so much uncertainty about what's going to happen to these two companies ... No one wants to get involved with these banks, he added.
Bank of America Chairman and Chief Executive Kenneth Lewis told executives at a senior leadership meeting on Thursday that Washington policymakers have assured him that the possibility of nationalizing the bank was not on the table, the Wall Street Journal said, quoting a person at the meeting.
Barclays Wealth, in a global daily note, said falling bond yields in the United States probably reflect a rumor in markets that two American banks risk being nationalized overnight.
Citigroup's bonds weakened on Thursday after bank analyst Meredith Whitney said on CNBC she would be a seller of the company's stock.
Citigroup plans to sell its stake in Brazilian credit card company Redecard, a source with direct knowledge of the plans said on Friday, potentially raising 3.05 billion reais ($1.27 billion) for the U.S. banking giant.
Last month Bank of America posted its first quarterly loss in 17 years, after mounting losses at recently acquired Merrill Lynch. Citigroup has lost $28.5 billion in the last 15 months, hammered by bad debts and toxic assets.
Each bank has received $45 billion in government aid in recent months and a backstop on losses on toxic assets. The aid exceeds the banks' current market value.
(Reporting by Sitaraman Shankar, Dominic Lau and Olesya Dmitracova in London; Peter Starck in Frankfurt, and Elinor Comlay and Juan Lagorio in New York; editing by John Wallace)