Hours after taking $20 billion in new state cash, Bank of America and recent addition Merrill Lynch revealed they had lost almost as much last quarter, while Citigroup also made thumping losses.
Bank of America said it had lost $1.79 billion in the fourth quarter, while Merrill lost $15.3 billion, and Citi revealed a loss of $8.29 billion, its fifth consecutive quarterly loss, and said it would split in two.
Late on Thursday the U.S. government had said it would give Bank of America the extra cash to help it absorb Merrill, and the U.S. Senate cleared the release of the remaining $350 billion of emergency funds to tackle the economic crisis.
But as further evidence that economies and credit markets are not responding to the billions in bailouts being spent across the world and the huge cuts in interest rates, Bank of Japan Governor Masaaki Shirakawa said financial conditions in the world's second-biggest economy were tightening rapidly.
Conditions in France were also on the slide, as its central bank said it expected the economy to have contracted sharply in the final quarter of 2008, after its business survey showed sentiment soured and economic activity declined.
British ministers are also aiming to announce another bank bailout plan next week, a Treasury source told Reuters, while Ireland nationalised Anglo Irish Bank in a dramatic move to save its third-largest lender from possible collapse.
"There's been another wave of the banking crisis," said Bernard McAlinden, strategist at NCB Stockbrokers in Dublin. "There was bad lending. The problem was compounded by the sheer weakness of the economy. So now decent lending has turned bad. It's gone full circle."
As Ireland's Finance Minister Brian Lenihan acknowledged that Ireland's reputation had been damaged by the rescue, the cost of insuring the country's debt rose sharply on Friday.
But stock markets in Asia and Europe took heart from The Senate vote and Bank of America package. The Nikkei closed up 2.6 percent, Europe's biggest shares were up nearly 3 percent, and futures for the major U.S. indexes all pointed to an opening gains, though Citi and Bank of America results cooled sentiment in New York.
FEAR IN THE MARKETS
Shares in Bank of America and Citigroup had tumbled on Thursday, while the U.S. two-year interest rate swap spread — a gauge of risk aversion — swelled to retest its widest levels in a week and European banks hoarded cash.
Moody's Investors Service cut the debt rating of JPMorgan Chase & Co by one notch, citing potential losses over the next 15 months.
"Clearly we are back to a period of fear in the markets, and specifically about the financials," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.
Bank of America will receive $20 billion of capital, in exchange for preferred stock, and a federal backstop against $118 billion of bad assets under an emergency plan announced by the Treasury Department, the U.S. Federal Reserve and Federal Deposit Insurance Corp.
The capital injection, which comes on top of the $25 billion the bank has already received under the Troubled Asset Relief Program (TARP), is aimed at helping it absorb credit losses at Merrill Lynch & Co, which it bought on Jan. 1.
Citigroup, which has already received $45 billion from TARP, said on Friday it would restructure into two units — one to focus on universal banking, the other on brokerage and retail asset management — while shedding weaker businesses and troubled assets.
The U.S. Senate on Thursday rejected a bid to block the release of the second half of a $700 billion bailout programme, handing an early political victory to President-elect Barack Obama, who will be sworn in next Tuesday.
FINANCIAL STRAIN
Bank of Japan Governor Shirakawa's comments highlighted a renewed strain in financial markets as investors realise the credit crisis has not yet run its course.
"Japan's financial system is stable as a whole. But sustained global market tensions are affecting financial institutions' businesses through stock price falls and rising credit costs," Shirakawa told a meeting of the central bank's regional branch managers.
In Britain, ministers are looking at a new range of measures to unblock frozen credit markets, with plans to guarantee interbank lending featuring high on the agenda, the Treasury source said.
Ireland stepped in to take full control of Anglo Irish Bank, whose stock market value had gone into freefall since a loans scandal last month, to secure the niche lender's 80 billion euros of deposits.
"We cannot afford the risk of any default in honouring the deposits; that is fundamental," Finance Minister Lenihan told a late-night news conference.
The Irish government tied the state to the fate of the banking sector last October when it agreed to guarantee all deposits of major Irish lenders and foreign banks with a significant Irish presence.
