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Fears Mount In Banking Sector

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By STEVENSON JACOBS and DANIEL WAGNER

The Associated Press

Published: January 16, 2009

NEW YORK - The banks may need a bigger bailout.

The government is mulling another multibillion-dollar aid package for Bank of America Corp., raising the possibility that much more taxpayer money will be needed to keep the banking industry from edging back toward the abyss.

Investors took the news badly. Bank of America shares fell as much as 28 percent to their lowest level in 18 years before closing down 18 percent. Citigroup shares fell to a near 16-year low, closing down 15 percent amid concerns about its stability. A grim earnings outlook from JPMorgan Chase & Co. escalated the pessimism. Its shares lost 6 percent.

But the sense of panic that has hovered over Wall Street in recent days does not seem to have breached Capitol Hill. Lawmakers, wary of pushback from constituents, reluctantly released the second $350 billion in the Treasury's financial rescue fund Thursday after assurances that $50 billion to $100 billion would be spent to try to reduce foreclosures.

The bank sector's tumble stoked investor fears that a darkening economic outlook is hurting government efforts to resuscitate the banking industry. And it raised the possibility that the $700 billion financial rescue package might swell even further.

"The perception on Wall Street is that things are getting worse and that the banks are bearing the brunt," said Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago.

Bank of America, which already received $25 billion under the government's Troubled Asset Relief Program, or TARP, could get billions more to help it absorb losses from its buyout of Merrill Lynch, according to a person with knowledge of the discussions, who spoke to The Associated Press on condition of anonymity.

The plan could be modeled after a government lifeline that was thrown to Citigroup in November, the person said. Under such a plan, the government would give Bank of America another capital infusion and possibly guarantee losses on problem loans. A fresh capital injection could come from the bailout, while any money for loan guarantees could come from a mix of government sources.

Such a move would support the growing consensus among financial experts that Treasury's bailout program so far won't be enough to stabilize banks reeling from bad mortgage loans and falling home prices. As the recession deepens, consumers and businesses are increasingly defaulting on other loans, such as those involving credit cards and commercial real estate, analysts say.

"It was getting better for a while, but now it's just going to hell," said Bert Ely, a banking consultant. "The worse it gets, the more the government is going to have to do - and the problem is, we just don't know.

"There may have to be additional TARP money put on the table. ... There's nothing magic about the $700 billion number. That could be increased to a trillion, a trillion and a half in a flash."

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