Banking crisis deepens as U.S. mulls Bank of America aid

Pedestrians and advertisements can be seen reflected in the windows of a Bank of America branch in New York, October 8, 2008.

NEW YORK (Reuters) - Bank of America Corp and Citigroup, two of America's largest banks, faced a crisis of confidence as their shares sank and investors questioned whether they have enough capital to cover losses from toxic assets and the contracting global economy.

Bank of America (BAC.N) is close to receiving billions of dollars of support from the U.S. government as it tries to digest Merrill Lynch, the investment bank and brokerage it bought on January 1. Merrill has billions in troubled assets -- ranging from commercial real estate to subprime mortgages -- that suffered during the brutal fourth quarter.

Although many banks have already received billions of dollars in government bailout funds, they are likely to go back to the well, experts said.

"The large banks in the U.S. are not lending, and they're desperate to conserve capital. They're acting like they're insolvent. The markets think they are insolvent. Banks only remain going concerns because the federal government is topping up their equity," said Dan Alpert, an investment banker at Westwood Capital in New York.

Earlier, Citigroup (C.N) shares plunged 23 percent, driving the stock below $5, their lowest level since a government rescue in November. The bank faces growing concern it will struggle to rebound from punishing losses.

WORST NOT BEHIND US

More bad news is expected on Friday, when the bank plans to report quarterly results, six days ahead of schedule, and analysts are looking for a fifth straight multibillion-dollar loss. The bank is also widely expected to provide details of a comprehensive downsizing designed to ensure its survival.

Rival JPMorgan Chase (JPM.N), now the largest U.S. bank by market value, also moved up its earnings report by six days to Thursday.

There's little hope of a turnaround anytime soon, JPMorgan CEO Jamie Dimon told the Financial Times in an interview.

"The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009," Dimon told the paper. "In terms of our sector, we expect consumer loans and credit cards to continue to get worse."

Once the world's largest bank but now only the U.S. No. 3, Citigroup is expected to shrink by about one-third as it focuses on corporate, investment and retail banking and trims trading operations, a person familiar with the plan said.

Citigroup will also put unwanted businesses and assets into a separate structure, with an eye towards their eventual sale, the source said.

The U.S. Treasury Department rescued Citigroup by giving it $20 billion (13.7 billion pounds) of extra capital from the Troubled Asset Relief Program in November. As part of that deal, the government agreed to share losses on a $306 billion portfolio with the bank.

The bailout prevented a collapse on the heels of the Lehman Brothers Holdings Inc's LEHMQ.PK bankruptcy on September 15.

CONFIDENCE SHAKEN

That was the same weekend that Bank of America agreed to buy Merrill Lynch, then the owner of the country's top retail brokerage, which had been hobbled by its exposure to toxic mortgage assets.

Now Bank of America appears to need taxpayer help to digest that deal.

The U.S. government is close to pledging billions of dollars of additional aid to Bank of America with the acquisition, a person familiar with the situation told Reuters.

Bank of America told the government in December that it was unlikely to complete its purchase of Merrill Lynch because of the losses, a person familiar with the matter said. The bank and the government have been speaking since then.

The deepening problems at the two banks have shaken confidence in their CEOs, who have struggled to respond to the deepening meltdown in the housing market that hammered mortgages and now threatens other products like credit cards.

Critics have said Citi CEO Vikram Pandit, known from his days as a top Morgan Stanley executive as a brilliant but cautious leader, was not aggressive enough in tackling the morass that Citigroup's $2 trillion-plus balance sheet had become.

Bank of America CEO Kenneth Lewis had long been well regarded for helping to transform Bank of America into a national powerhouse through acquisitions like FleetBoston Financial Corp and credit card issuer MBNA Corp. But the need for further TARP money, along with the continued rout in the shares, may change that viewpoint.

Bank of America shares, which closed the main trading session 77 percent off their 52-week high, fell further in after-hours trading, hitting their lowest level since December 1991.

(Writing by Christian Plumb; Editing by Gary Hill)