Nationalization rumors sink stocks

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By Patrice Hill

UPDATED:

Fears that the federal government will be forced to nationalize some of the nation's largest banks sent the stock market plummeting Friday, driving the Dow Jones Industrial Average to a six-year low.

U.S. stocks took a cue from overseas markets, where European and Asian indexes suffered major losses on fears that the rapid deterioration of the global economy has left many of the world's major banks at a point where only government takeover can preserve them.

That sent U.S. stocks plummeting at Friday's opening, and the rout gained momentum at mid-day when Senate Banking, Housing and Urban Affairs Committee Chairman Christopher J. Dodd said during a Bloomberg television interview that the United States may have to temporarily take over some banks.

"I'm concerned that we may end up having to do that, at least for a short time. I don't welcome that at all, but I could see how its possible it may happen," said Mr. Dodd, who gained notoriety in the financial markets last week by slipping a provision into the economic stimulus bill retroactively limiting the pay of any bank executives who took federal bailout money.

The Connecticut Democrat's remarks spurred a 253-point dive by the Dow, which had already fallen to levels not seen since 2003, It was led by huge drops in the stocks of major banks including Wells Fargo, Citigroup and Bank of America. At one point, megabank stocks like Citigroup and Bank of America plunged into the $1 to $2 range as investors dumped shares in fear that a government takeover would render their stock holdings worthless.

The drubbing of bank shares forced both Citigroup and Bank of America to issue statements saying they remain in solid shape and are not about to succumb to a government takeover.

Worries that the stock market was on the verge of a meltdown prompted calls on Wall Street for reassurance from political leaders that nationalization is not in the offing. The White House came through with a statement in midafternoon, saying, "This administration strongly believes that a privately held banking system is the correct way to go."

The Treasury Department, whose failure to produce a plan to aid failing banks helped set off the global stock drubbing a week ago, also sought to squelch the rampant speculation on Wall Street.

"There are a lot of rumors in the market, as always, but you should not regard these as any indication of the policy of this administration," said Treasury spokesman Isaac Baker. "As Secretary [Timothy F.] Geithner has said, we will preserve a financial system that is owned and managed by the private sector."

Those reassurances enabled the Dow and other indexes to recover some of their losses. But the venerable blue-chip index ended the day down 100 points at 7,365, its lowest level since the depths of the steep bear market of 2002. The Dow, Standard & Poor's 500 Index and Nasdaq Composite Index all ended down more than 1 percent, with the S&P 500 closing near a 12-year low.

Edward Yingling, president of the American Bankers Association, criticized Mr. Dodd's comments, which were later contradicted in a Bloomberg interview by his House counterpart, House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat.

"We believe that the whole discussion about nationalization is impairing the financial sector and making the credit situation worse," said Mr. Yingling, adding that it also undermines the government's goal of reviving private investment in banks. "Investors will remain on the sidelines if there is continued speculation that the government may step in and undercut their investment."

With stocks of major banks like Citigroup and Bank of America now worth only chump change, some analysts said the market value of the banks has dropped so far below the $90 billion the government already has invested in them that they've effectively been nationalized, no matter what the White House says.

"The two banks are implicitly nationalized, which is what is rocking investors," said Gregori Volokhin, a strategy chief at Meeschaert New York.

The latest downdraft in stocks reached an important benchmark Thursday when the Dow fell under a low point set Nov. 20, which many analysts had hoped would be the bottom of the bear market. Stock analysts say stocks will have a hard time finding their feet as long as the financial system and economy remain in apparent free fall.

The unrelenting slide by major banks and stocks benefited safe-haven markets like gold and Treasury securities Friday, with gold prices soaring back above $1,000 an ounce.

"The global financial system is showing its Humpty-Dumpty nature much easier to shatter than to put back together," said Edward Hadas, analyst at Breakingviews.com, noting that "complete nationalization has moved from a fringe idea into the mainstream."

"It's hardly surprising that the global stock market rally that started in November has been almost completely reversed," he said. "Investors fear that the economic crisis could take another nasty twist."