Battering Highlights Banking Sector's Fragility

Shares of Citigroup and Bank of America have bounced back after falling more than 20 percent Tuesday. Bank stocks plummeted after State Street, a bank thought to be relatively healthy, reported a huge loss on its investment portfolio.

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If Timothy Geithner is confirmed as secretary of the Treasury, one of the biggest challenges he'll be facing is what to do about the nation's banks. Already this year, major institutions such as Citigroup and Bank of America have reported big losses. Bank stocks were up today. But they are still trading at a small fraction of their value from a year ago. The federal government has already poured billions of dollars into major financial institutions and more money is expected.

Well, NPR's Jim Zarroli joins us now from New York and, Jim, Bank of America was down more than 20 percent yesterday and up more than that today. What accounts for that kind of volatility?

JIM ZARROLI: Well, January is earnings report season. We've had a lot of financial institutes coming out and saying they lost more money than they expected during the last three months of 2008. They're basically going through their books realizing that the securities they own are worth even less than they thought.

The big surprise yesterday was State Street Corporation, which is a money manager for big institutional investors, it reported big losses. And it's not just American banks - the Royal Bank of Scotland came out this week and reported the biggest loss in British corporate history. British banks are - they're just in so much trouble right now that it's hurting the value of the pound which fell to an all time low against the yen this week.

SIEGEL: Jim, are the problems of British banks due to the same factors affecting American banks?

ZARROLI: Yeah, very similar - a lot of bad investments and very risky complex securities. Royal Bank of Scotland was part of a consortium that purchased ABN Amro which was a Dutch bank that collapsed early on in this economic crisis. And when Royal Bank of Scotland issued its earnings report this week, it said one of the problems was that Amro's losses were a lot worse than they'd expected and this is a kind of pattern that we're starting to see emerging. You have these big banks that thought they could come in and snatch up these troubled banks and they really just ended up acquiring a big set of problems.

Another example was Bank of America, which was a healthy bank that decided to capitalize on the banking crisis by buying Merrill Lynch and Countrywide Financial. Well, it said last week Merrill's losses were a lot bigger than it thought and it had to ask the government for $20 billion to complete the deal, and that was on top of the $25 billion it had already received.

SIEGEL: Well, let's talk about what Geithner might do as secretary of the Treasury. As head of the Federal Reserve Bank of New York, was at the table as the Bush administration worked on financial rescue plans here for the best. What could he do on behalf of the Obama administration that hasn't already been tried?

ZARROLI: Well, one thing is, you know, we're seeing a lot of - hearing a lot of talk right now about nationalizing some banks. Now, that has already happened to a degree. We've seen the federal government buy out shares in banks like Citigroup that have done badly. But, the thinking now is the government might have to go further, might have to even take over banks entirely.

This is what happened in Sweden, which basically took over its banking system in the early '90s. Sweden was undergoing a financial crisis. It wanted to stabilize its banks, and what it did worked. Sweden was later able to come back and re-privatize its banks. The problem is U.S. banking sector is a lot bigger and more complicated. But, if this banking crisis keeps up, the government might not have a lot of choice and might have to consider what Sweden did.

SIEGEL: That's NPR's Jim Zarroli in New York. Thank you, Jim.

ZARROLI: You're welcome.

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