Wall Street panics; markets lose $1 trillion

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The Treasury, the Fed and other regulators will continue to aid failing banks on a case-by-case basis using a combination of loans, arranged takeovers, and the liquidation authorities of the Federal Deposit Insurance Corp., as they did in the case of Wachovia Corp. on Monday.

The FDIC announced that it was facilitating the takeover of Wachovia by Citigroup in a $2 billion deal in which the giant New York bank acquired Wachovia’s banking operations and took on $53 billion of its debt and up to $42 billion of its losses on a portfolio of $312 billion in loans.

The FDIC would cover any losses beyond that amount, while acquiring $12 billion in Citigroup stock and warrants. The FDIC claimed that the transaction would not result in any charges against its insurance fund or cost to taxpayers, while fully protecting depositors.

Many analysts expect more banks to fail or be taken over. The stocks of two leading candidates — National City and Fifth Third Bancorp — sank to levels between $1 and $3 a share in trading Monday on fears they may be the next in line.

Other major Wall Street firms moved to shore up their deteriorating finances Monday. Morgan Stanley agreed to sell a 21 percent stake to Japan’s Mitsubishi UFJ Financial Group for $9 billion and bankrupt Lehman Brothers Holdings Inc. agreed to sell its crown jewel — the Neuberger Berman asset management unit — for $2 billion.

“It just seems that there are only going to be two types of banks in existence now: the ones that survive and get market share, or the ones that get gobbled up and have to be euthanized,” said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel.

Even before Wall Street trading opened Monday, markets overseas were shaken as the governments of Belgium, the Netherlands and Luxembourg took partial control of struggling bank Fortis NV, while Britain seized control of mortgage lender Bradford & Bingley, and German lender Hypo Real Estate Holding got a credit line from the German government.

The bank failures prompted the Fed and European central banks to mount their biggest cash infusion to date, pumping up to $620 billion into stressed money markets where banks have been having difficulty getting overnight loans.

Despite that, stock markets in Europe fell more than 5 percent.

“Investors may have freaked out,” said Rob Cox, an analyst with Breakingviews.com. But he took solace in the hope that the administration will find other ways to rescue ailing banks like it did in the case of Wachovia as well as Washington Mutual and American International Group earlier this month.

This story is based in part on wire reports.

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