Despite billions, banks still teeter on the brink

updated 6:48 p.m. ET Jan. 21, 2009

NEW YORK - Wall Street is losing faith in Washington's efforts to fix the financial crisis. As bank losses pile up and bank stocks plunge, investors have an urgent question for the new Obama administration: What's the plan?

Timothy Geithner, Obama's pick for treasury secretary, had few answers as he began confirmation hearings Wednesday. He told lawmakers that two goals were to "get credit flowing again" and overhaul the $700 billion bailout, but he offered few details.

There's a lot riding on the new administration. Several of the largest U.S. banks, saddled with soured mortgage-backed assets, are edging toward the danger zone despite injections of billions of dollars from the government last year.

At the same time, the recession is gathering force, chewing up jobs by the hundreds of thousands and ruining many consumer and business loans that were once thought to carry little risk.

The first half of the federal bailout came with no requirement that the banks lend more. But even keeping the cash as a cushion hasn't stopped banks from sliding toward the precipice.

"The size of the problem is growing faster than the banks' ability to handle it," said Joe Battipaglia, market strategist at Stifel Nicolaus. "We're halfway through the bailout money, and the banks are in worse shape than they were six months ago."

Investors expect Obama's team to consider a range of options, including pumping more money into banks and creating a government entity to buy up bad bank assets so they'll start lending again.

But those prospects all raise troubling questions: Would stockholders be wiped out? How much taxpayer money would ultimately be needed? What could happen if the government takes an even bigger role in the banking system? And perhaps the biggest unknown: Would a bigger bailout get banks to start lending again and help pull the country out of recession?

For now, the focus is simply on keeping the banks alive.

Experts say household names like Citigroup and Bank of America, which have already received two government cash infusions apiece — will need even more to offset future losses and stay afloat.

The fear is that both banks are so big, so blended into the global financial system, that their collapse could trigger a catastrophe.

The most troubled banks are "going to definitely go down" without more government help, said Jonathan Macey, a law professor at Yale University who wrote a book about a bailout of Sweden's banking system during the 1990s.

AP Jobs, spending data hint at recovery In a hopeful sign for the economy, the number of newly laid-off workers filing claims for unemployment benefits fell below 500,000 last week for the first time since January. New-home sales rise to highest level in a year Consumers log stronger-than-expected rebound Durable goods orders fall unexpectedly Recovery's pace slower than first thought

"And they may go down with it," he added. "The pace of these bank losses is outrunning the infusions by the government."

Sheila Bair, chairman of the Federal Deposit Insurance Corp., sought to allay those worries Wednesday in an interview with The Associated Press. Still, she acknowledged investors' concerns.

"There's a lot of fear out there," Bair said. "We're going to work through this. It's going to be hard. It's going to take time. But we will work through it."

In the meantime, investors are agonizing. Citigroup's stock fell 20 percent to below $3 a share Tuesday. Bank of America shares tumbled 29 percent. Both banks rebounded some Wednesday, but experts say their troubles are far from over.

So why hasn't the bailout worked?

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