WRAPUP 4-Bank of America nears gov't aid, Citigroup shares drop

Published: 16 Jan 2009 01:56:11 PST

* Bank of America nears government aid for Merrill-source

* Bank of America, Citigroup to report Q4 Friday

* Shares tumble despite JPMorgan results (Adds WSJ report on bailout details)

WASHINGTON/NEW YORK, Jan 15 - Bank of America Corp is on the cusp of receiving a government infusion to help absorb Merrill Lynch & Co, but shares of the bank and Citigroup Inc tumbled on Thursday on worries over their ability to handle soaring credit losses.

Both banks face mounting pressure from investors who question how well they can absorb an expected tidal wave of loans gone bad in a deep recession.

More details will surface Friday, when Citigroup is expected to report a huge quarterly loss at 6 a.m. EST (1100 GMT), and Bank of America reports results an hour later. Both moved up their releases from next week.

Bank of America is expected to receive $15 billion of capital and a guarantee for some bad assets, a financial policy source familiar with the talks said.

The capital would be on top of $25 billion the bank previously got from the Treasury Department's Troubled Asset Relief Program (TARP). The Wall Street Journal said the backstop could cover as much as $120 billion of assets.

A guarantee could resemble the $306 billion backstop that Citigroup got in November. Bank of America would assume early losses, Treasury and the Federal Deposit Insurance Corp would share in a second class of losses, and the Federal Reserve would be responsible for much of the rest, the Journal said.

U.S. President George W. Bush and President-elect Barack Obama have signed off on aid, including the guarantee, the financial policy source said.

Bank of America sought the aid to absorb growing credit losses at Merrill, which it bought on Jan. 1, creating the largest U.S. bank.

The bank and Treasury declined to comment. The other regulators were not immediately available.

Bank of America is expected to post a quarterly profit of 19 cents per share, according to the average of analysts' expectations, but some analysts expect a loss.

Citigroup, meanwhile, is expected to post a fifth straight multibillion-dollar quarterly loss, with analysts expecting a loss of $1.32 per share, excluding items.

The bank is also expected to unveil a plan to significantly shrink its balance sheet and business model, a source has said. It has received $45 billion in TARP money.

'WARDS OF THE STATE'

Analysts have raised the specter that both Bank of America and Citigroup could be nationalized at taxpayer expense.

"They both will likely become wards of the state," said Doug Kass, who heads the hedge fund Seabreeze Partners Management, referring to Bank of America and Citigroup. "They are too big to fail."

Any effective government takeover would follow similar moves involving mortgage finance companies Fannie Mae and Freddie Mac and banks in Great Britain and Iceland. Meanwhile, Ireland's government nationalized Anglo Irish Bank Corp Plc on Thursday.

Citigroup denied speculation it might be nationalized, CNBC television reported. A bank spokesman declined to comment.

"Developments in the banking system are a reflection of the sustained and considerable headwinds facing balance sheets due to legacy assets and the further deterioration in economic conditions," said Mohamed El-Erian, chief executive of Pacific Investment Management Co, also known as Pimco.

Analysts said the government would like to avoid a repeat of the downfall of Lehman Brothers Holdings Inc, whose Sept. 15 bankruptcy was viewed as a key trigger in the broad downturn in world economies and equity markets.

FDIC chief Sheila Bair told reporters in New York she would be "very surprised" if any large U.S. bank was nationalized, and that her agency had enough reserves to cover bank failures. Analysts expect hundreds of such failures this year and next.

Some positive news came Thursday from JPMorgan Chase & Co. The No. 2 U.S. bank reported a 76 percent decline in quarterly profit but still topped some analysts' expectations.

However, the bank boosted its estimate of potential losses from credit cards and from Washington Mutual Inc, which it took over last September ID:nN1491543.

Moody's Investors Service lowered the bank's credit rating, saying "consecutive quarterly losses in the next twelve to fifteen months cannot be ruled out."

Bank of America shares closed down $1.88, or 18.4 percent, at $8.32, but rose to $8.97 after hours. Citigroup fell 70 cents, or 15.5 percent, to $3.83, and rose to $3.95 after hours. JPMorgan closed down $1.57, or 6.1 percent, at $24.34.

The KBW Bank Index .BKX> slid 8 percent, including a 26 percent drop at Marshall & Ilsley Corp. That Milwaukee bank said soured residential development loans, including in Arizona and Florida, led to a surprise quarterly loss.

OVERREACHING

Bank of America's need for government help raised questions about whether CEO Kenneth Lewis overreached by buying Merrill for about $19.4 billion, and Countrywide Financial Corp, the largest U.S. mortgage lender, for $2.5 billion in July. Neither purchase involved government help.

The purchases extended Bank of America's tentacles throughout the financial system in a period of pronounced economic weakness. Many analysts now expect Bank of America to cut its dividend again, after halving it in October.

"This looks, feels and smells like a redux of Lehman," said Tom Sowanick, chief investment officer of Clearbrook Financial LLC in Princeton, New Jersey.

The Financial Times said Lewis sent lawyers to examine Merrill's books to determine if results worsened so materially that he could invoke a contractual right to scrap the merger.

Meanwhile, Citigroup CEO Vikram Pandit is expected to shrink the bank by about one-third, after $20.3 billion of losses in the year ended Sept. 30. But investors worry that any plan will dilute shareholder stakes, or not go far enough.

"There is no faith in Bank of America and Citi," said Todd Leone, head of listed trading at Cowen & Co in New York.

Lawmakers expressed concern about the industry's fragility. "They'll be back for more money" from TARP, said Sen. Bob Corker, a Tennessee Republican. "Our banking system is going to lose hundreds of billions of dollars," and taxpayer money is "going down the drain," he said.