White House favours U.S. banks staying private

NEW YORK (Reuters) - The White House said on Friday it did not favour nationalizing U.S. banks as a tool for repairing the damaged financial system and helping reverse the global economic slowdown.

But the comments, which briefly boosted stock markets, came as a top adviser to U.S. President Barack Obama, former Federal Reserve chairman Paul Volcker, said the global economy may be deteriorating even faster than during the Great Depression.

The latest daily confirmation of such pessimism came from Europe, where data on services and manufacturing hit a record low, and Asia, where the Bank of Japan gave a dire diagnosis.

Shareholder fears of being wiped out if U.S. banks are nationalized drove stocks down and boosted safe-haven commodities like gold.

"Let me reassure as best I can on banks," White House spokesman Robert Gibbs told a news conference. "This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring they are regulated sufficiently by this government."

The Treasury Department later reinforced the comments, saying in a statement: "There are a lot of rumours in the market, as always, but you should not regard these as any indication of the policy of this administration. As Secretary Geithner has said, we will preserve a financial system that is owned and managed by the private sector."

A CNBC report said the Obama administration would provide some details on its plan for rescuing U.S. banks next week. Markets have been clamouring for specifics on plans to shore up the financial system, source of the credit freeze that has paralyzed global economic activity.

Volcker, chairman of Obama's economic recovery board, said: "I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," he said.

Obama himself promised careful oversight of the recently signed $787 billion economic stimulus package, saying he would call any instance of government waste to task.

"If a federal agency proposes a project that will waste that money, I will not hesitate to call them out on it, and put a stop to it," he said.

U.S. stocks fell, with the Dow industrials closing at a 6-1/2-year low [ID:nN20295978]. The Dow fell 1.3 percent to 7,365.67. The S&P 500 was down 1.1 percent. For the week, the Dow fell 6.2 percent, the S&P 500 slid 6.9 percent and the Nasdaq lost 6.1 percent.

U.S. bank stocks fell for a sixth straight day. Citigroup, Bank of America and Wells Fargo dived after Sen. Christopher Dodd, chairman of the U.S. Senate Banking Committee, said some banks may need to be nationalized "at least for a short time," according to a Bloomberg report.

The banking shares recovered some of their losses after the White House reassurance, but Citigroup shares still ended at $1.95, their first close below $2 since January 1991.

Crude oil prices fell below $39 a barrel, after shooting 14 percent higher the day before, while gold pushed through the $1,000-per-ounce barrier to a seven-month high.

'NEAR CLIFF'S EDGE'

Earlier, grim euro zone services and manufacturing data dragged European shares to six-year lows, and Asian stocks fell to their lowest since December.

Worries over the level of exposure of Western European banks to Eastern European economies, and fears that foundering banks could also be nationalized, hit the euro currency as well as bank stocks.

The euro zone February flash purchasing managers' index for the services sector hit a record low of 38.9. French business morale also dropped to a record low this month as falling orders hit confidence and manufacturers braced for the possibility of falling prices.

European stocks tumbled to a six-year low as investors fretted about the prospect of more capital increases and bank nationalizations on the back of a deepening economic downturn.

"We're near the cliff's edge, very close to capitulation, the mood is very gloomy," said Jean-Claude Petit, head of equities at Barclays Wealth Managers France.

"I'm not sure that governments and central banks are realizing what's really going on. The gaffes made by West-European banks in East Europe revealed recently are having a devastating effect on the market," he added.

The FTSEurofirst 300 index of leading European shares hit a six-year low and closed down 3.7 percent. The MSCI world equity index hit its weakest since November 21, and ended down 1.3 percent.

GERMAN STIMULUS

Germany's upper house approved a 50 billion euro ($62.88 billion) stimulus package on Friday to help it withstand its worst recession since World War II.

German Foreign Minister Frank-Walter Steinmeier said a process had begun to consider how financially strong euro zone nations could help weaker members of the currency union, though it was too early to say what steps might be taken.

In Eastern Europe, evidence has been mounting of governments struggling to find sources of financing, as global economic woes have reduced the available cash to fund budget deficits, investment and domestic lending.

The economic tsunami also claimed political casualties. Latvia's unpopular four-party coalition government fell. The country was forced to take an IMF loan last year.

Representatives from Africa and poorer Asian nations have been asked to attend the G20 financial crisis summit in London on April 2, British Prime Minister Gordon Brown said.

The Bank of Japan said in its bleakest diagnosis ever that economic conditions were deteriorating rapidly and would likely to continue to deteriorate for the time being.

Asian finance ministers will consider expanding a currency swap scheme to $120 billion from $80 billion at a meeting this weekend to help protect their economies.

(Reporting by Reuters bureaux worldwide; Writing by Steve James; Editing by Gary Hill)