U.S. moves to speed recovery funds, fears slam banks

By Herbert Lash

NEW YORK (Reuters) - Fear of soaring credit losses at the top three U.S. banks rattled financial markets on Thursday, but efforts in Congress to expand a U.S. economic stimulus package and speed release of bailout funds eased concerns on Wall Street.

Shares of Bank of America Corp and Citigroup Inc plummeted on credit worries, but U.S. stock markets reversed steep losses and rose on optimism the U.S. government will act to avert a deepening of the year-long recession.

The U.S. Senate rejected a bid to block the release of the second half of a $700 billion bailout program, handing an early political victory to President-elect Barack Obama, who will be sworn in next Tuesday.

Earlier, Democratic leaders in the House of Representatives unveiled an $825 billion tax cut and spending bill they hope will help Obama reverse an economic slump that shows fresh signs of sinking further into recession.

The credit crisis claimed another victim when Ireland nationalized Anglo Irish Bank, the nation's No. 3 bank, to prevent a collapse that threatened to undermine the banking sector and cripple the country's finances.

The bank's stock value had gone into freefall since a loans scandal last month. The Irish government said full state control would ensure that the lender's 80 billion euro ($105.2 billion) worth of deposits would be secure.

Job losses in the U.S. economy mounted last week and manufacturing remained in dire straits this month, according to data on Thursday, while the threat of deflation persisted in December.

Economic data elsewhere also pointed to a deeper global slowdown. President Jean-Claude Trichet of the European Central Bank said the euro zone economy was looking weaker than the bank had thought just a month ago and Japanese manufacturing data from November also flagged the risk of deflation.

Bank of America Corp, the largest U.S. bank, is in talks to receive about $15 billion in additional government aid and a deal is was expected to be announced when the bank reports earnings. Originally Bank of America was to report earnings on Tuesday next week but late Thursday it moved up its earnings announcement to Friday.

The deal may be structured to help the bank absorb the credit losses at Merrill Lynch & Co, which it bought on January 1, a source told Reuters. Losses at Merrill were much higher than expected, a person familiar with the matter said.

Citigroup is also expected on Friday to post a fifth straight multibillion-dollar quarterly loss and unveil a plan to significantly shrink its balance sheet and business model.

JPMorgan Chase & Co, meanwhile, reported a 76 percent drop in fourth-quarter profit as it wrote down bad loans, showing that even a bank that has avoided the worst of the credit crunch is still struggling with the recession.

The bank turned a profit only because of special items, and after Moody's Investors Service cut the bank's debt rating one notch, its shares pared gains and turned negative.

While some analysts said Wall Street overreacted to news that Bank of America would tap more bailout funds, scant details about a possible deal led investors to dump the stock. Some analysts speculated the banks could be nationalized.

"They both will likely become wards of the state," said Doug Kass, who heads hedge fund Seabreeze Partners Management. "They are too big to fail."  Continued...