Fears of US Bank Nationalization Cause Drop in Financial Shares

"When you talk about nationalization you hear the names Citi and Bank of America as the top two names burning out," said Walter Todd, a portfolio manager at Greenwood Capital Associates, which holds shares of Bank of America.

Bank of America dropped 7 percent to $4.25 on the New York Stock Exchange at mid-afternoon, while Citigroup fell 10 percent to $2.62 after touching $2.50 -- its lowest level since July 1991.

The KBW Financial index fell 3.59 percent to 22.58 after touching a 17-year low.

Last month, Bank of America Corp posted its first quarterly loss in 17 years, after mounting losses at recently acquired Merrill Lynch. Citigroup has lost $28.5 billion in the last 15 months, hammered by bad debts and toxic assets.

The question of whether we should "nationalize" our crippled banks. To the political right, the very word smacks of the world of banana republics. To the left, it's just what those idiots on Wall Street deserve, and long overdue...

Yet if you peer beneath the terminology at the underlying reality, it's obvious that nationalization of the banks is a done deal. We bought them. We own them.

The only problem is that we've failed to exercise our right to control them.

As part of its $700-billion bank bailout, the U.S. government is injecting $45 billion of taxpayers' cash into each of the two most impaired institutions in the elephantine herd, Bank of America and Citigroup. The government has also pledged to cover $419 billion in losses at the two institutions.

The cash injections alone are almost enough to buy up all of BofA's outstanding common stock twice over and Citi's stock three times over. Yet the government has failed to demand any specific performance in return. There have been no sackings of management and no mandate that the money be applied to support loans in credit-strapped sectors, like small and medium-size businesses.