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Banking crisis intensifies as Obama assumes White House

The economic woes facing President Barack Obama took on new urgency on his first day as the global banking crisis intensified and speculation grew on nationalization of the troubled sector.

world Updated: Jan 21, 2009 11:40 IST

The economic woes facing President Barack Obama took on new urgency on his first day Tuesday as the global banking crisis intensified and speculation grew on nationalization of the troubled sector.

US banking shares took a beating on Wall Street, on the heels of fresh trouble in Britain, which launched a huge new bailout, and Belgium, which planned to launch a second rescue plan.

The Standard & Poor's banking index plunged 21 percent in one of its worst days ever as fears mounted about the sector.

"Financial stocks continue to decline sharply as estimates of write-offs escalate," said Rod Smyth at Riverfront Investment Group.

"Thus far, the financial sector has recognized losses of approximately one trillion dollars, but both Wall Street analysts and the International Monetary Fund believe that total losses will ultimately fall closer to two trillion," said Smyth.

"Investors' primary concern is that the government (and taxpayers) will have to inject a lot more capital and will need to be repaid before any profits and dividends can flow to shareholders. There is also a growing fear that weaker banks will be nationalized, leaving shareholders empty-handed."

In Britain, shares in RBS, which is majority owned by the British government, crashed 66.57 and rival Lloyd's fell more than 31 percent.

Key US bank Citigroup slid 20 percent to 2.80 dollars and Bank of America -- which got a bailout last week of 20 billion dollars in US capital -- tumbled 28.9 percent to 5.10 dollars.

Among other financial groups, JPMorgan Chase sank 20.7 percent to 18.09 dollars and Wells Fargo dropped 23.8 percent to 14.23 dollars as the broad stock market slid more than five percent.

The plunge "served as visceral evidence of what President Barack Obama described in his inaugural remarks as 'a nagging fear that America's decline is inevitable,'" said Elizabeth Harrow at Schaeffer's Investment Research.

Patrick O'Hare at Briefing.com said the market was punishing the banking sector despite the latest bailout last week in which Bank of America got a fresh 20 billion dollars in government capital and a guarantee on shaky assets.

The stock market's steep drop suggests "that Mr. Obama's honeymoon period will be a short one -- it may already be over."

O'Hare said the market fears "a nationalization of the banking system" at least in Britain and possibly elsewhere.

The analyst noted that the steep losses projected by RBS of as much as 41.3 billion for fiscal 2008 "helped trigger a new round of intervention by the UK that some believe will ultimately lead to a full-scale nationalization of RBS and perhaps the banking system in the UK."

"After the week Bank of America, Citigroup and others had last week, similar concerns, unthinkable just 18 months ago, continue to fester here at home," O'Hare said.

Brian Wesbury at First Trust Portfolios said an idea gaining credence is an "aggregator bank" to remove the bad assets from the banking system, similar to the Resolution Trust Corp. established to clean up US thrifts in the 1980s and 1990s.

But he said the losses have been magnified by "mark to market" accounting rules that force companies to recognize losses instead of holding them through a downturn, and suggested another option.

"Rather than having the government buy all of the bad assets and hold them in a Big Bad Bank, why not allow individual banks that already hold these assets to sequester them and have the federal government provide insurance?" he said.

"Bad loans will still be bad loans, but the erosion in capital accounts from markdowns will be halted. This is the only real way to stop the vicious cycle of mark-to-market accounting without having the government spend even more hard-earned taxpayer dollars."