Word: loan
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Bank of America's shares have similarly traded down since it landed its own loan guarantee deal from the government. In that bank's deal, the government agreed to pick up nearly $100 billion in losses. That hasn't stopped the bleeding at Bank of America, either. Bank of America stock, like Citigroup's, has continued to fall. The company's shares closed on Friday at $6.53, down from $7.18 in mid-January when it announced its deal with the government...
...clear why the loan guarantees are doing so little to shore up confidence in the two banks. Some say it's because investors fear the problems at the banks are larger than the guarantees they received. What's more, both guarantees involve the two banks taking more losses before the government insurance kicks in. In Citigroup's case, the bank will have to swallow $29 billion more in bad loans before it is protected from further losses...
Another problem is lack of flexibility. Citigroup is just protected against losses in the $300 billion portfolio it sets up with the government. Any losses outside of that loan group are all Citi's. As a result, some investors are worried that Citigroup even with the new guarantees won't have enough capital pay for the loan losses it will have to realize. By some estimates, Citigroup's shareholder capital could be wiped out if just 2% of its loans go unpaid...
Nonetheless, the idea of new loan guarantees as the solution to fix the banking crisis appears to be gaining momentum in Washington and abroad. Earlier in the week, Treasury Secretary Timothy Geithner seemed to have struck a deal between the FDIC and the Federal Reserve to roll out a new phase of the bank bailout plan that would include both guarantees and direct asset purchases. The latter plan is favored by the FDIC and is often called the "bad bank" approach, because the government would set up an institution to buy up all the loans or bonds that are backed...
...Friday, reports surfaced that Geithner was thinking about shelving the bad bank approach for now, and just moving forward with the loan guarantee program. If it does, Washington officials would not be alone. Last week, Britain rolled out its own loan guarantee program as part of that country's effort to help its struggling banks...