NEW YORK AND WASHINGTON — Months after the worst of the financial crisis seemed to have passed, fears of debilitating losses for the nation's banks returned to the forefront Thursday on Wall Street and in Washington.
The federal government said late Thursday night that it had agreed to invest an additional $20 billion in Bank of America Corp. and to share losses on $118 billion of the company's assets.
The announcement came after a Senate vote gave President-elect Barack Obama access to the second half of the government's $700-billion financial rescue fund.
Earlier in the day, traders pounded financial stocks on growing worries about the sector and on market rumors that Citigroup Inc. or Bank of America -- or both -- could even be nationalized.
When the financial crisis reached its peak last fall, the fear was that it would damage the overall economy. But after a surge in unemployment, a plunge in retail sales and a consensus that a deep recession is underway, the worry on Wall Street now is that the worsening economy will cause spiraling losses for banks, which have already reported hundreds of billions of dollars of mostly mortgage-related write-downs since the home-loan meltdown began about two years ago.
An index of bank stocks plunged 11% on Thursday, before rebounding to close with a 5.1% loss. The Dow industrials sank more than 200 points but ended with a 12-point gain.
Shares of Citigroup and Bank of America lost more than one-quarter of their value before finishing the day down 15% and 18%, respectively.
"The market is saying, 'Oh my, these guys have a continuing stream of losses that is likely to get worse with a deepening recession,' " said Dan Alpert, managing director at Westwood Capital, a New York-based investment bank.
In Washington, despite widespread bipartisan dissatisfaction with how the Bush administration spent the first $350 billion of the financial rescue fund, the Senate voted 52 to 42 against a Republican-sponsored bill to block release of the remaining $350 billion.
Many lawmakers have criticized Treasury Secretary Henry M. Paulson's surprise decision last fall to drop plans to use the money to buy toxic mortgage-backed securities and to instead make direct injections of cash into banks to stabilize the financial system.
Democrats also were upset that Paulson didn't use any of the money to modify mortgages to reduce the number of foreclosures.
