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BANGALORE (Reuters) - Nationalization of banks is not the right approach to bring the battered U.S. economy back on track, several Wall Street analysts said in response to reports that the U.S. government was planning to raise its stake in the ailing financial giant Citigroup Inc.
FBR Capital Markets analyst Paul Miller termed nationalization a "scary proposition" for investors and said the quickest and lowest-cost solution was to close down troubled financial institutions.
"Until these so-called toxic assets are extracted from large financial institutions, banks will continue to de-leverage and hoard capital, investors will continue to flee banking stocks and confidence in the United States and global financial systems will continue to suffer," Miller wrote in a note to clients.
Rochdale Research's Richard Bove said if the banking industry was nationalized for only 15 minutes, it would be enough time to wipe out the total investment of shareholders in the industry.
"Nationalization would not only cause millions of Americans to lose trillions of dollars, it would impose a system on the U.S. economy that would destroy its ability to recover for decades," Bove said.
UBS said it was unclear why banks need to be nationalized right now as, according to the brokerage, banks have ample liquidity and can continue to operate until the economic environment improves.
At a more favorable environment, the banks can recapitalize and come off government liquidity buffers, UBS wrote in a note.
Nationalization of Citigroup is a trap that the U.S. government should avoid as such a step would likely cause all bank stocks to get crushed in fear, an analyst at Fox-Pitt Kelton said.
Government intervention in Citigroup's operations is completely unnecessary as long as depositors are calm, and the government should not set a precedence of catering to the stock market's fears and the associated pressure from the media, analyst David Trone said in a note to clients.
The government could harmfully meddle in Citi's operations and strategy, and many potential customers and employees will avoid Citi, making it unprofitable even in normal times, Trone said.
"If we're right, the government will have a hard time ever selling its stake back to the public markets."
Citigroup is in talks that could see the U.S. government take a bigger stake, a source told Reuters, sparking a recovery in the battered share price of what was once the country's most valuable bank.
Standard & Poor's Equity Research kept a "hold" rating on the company, and said if the government decides to nationalize Citigroup, it would be more of a psychological move than tangible and no real capital would be added to the company.
"But it might help ease investors' concerns over the banking space," the brokerage said.
Barclays Capital said it was unclear how an increased U.S. government ownership could potentially impact Citigroup's largest presence in other countries.
However, most of the bank stocks rose on Monday as investors seemed to cheer the possibility of an increased regulatory stake in the Citigroup.
Shares of Citigroup were up almost 10 percent, while those of Bank of America Corp and U.S. Bancorp rose 7 percent in midday trade on the New York Stock Exchange. Wells Fargo & Co shares were up nearly 4 percent.
Reporting by Anurag Kotoky in Bangalore; Editing by Gopakumar Warrier, Himani Sarkar