After Market Dive, White House Strains to Contain Talk of Nationalizing Banks

The Obama administration is straining to tamp down speculation that major banks will be nationalized, after jittery investors sent financial stocks into a tailspin Friday. 

Federal regulators released a joint statement Monday insisting -- even as they announced plans to unroll a revamped program to shore up financial institutions -- that U.S. banks should stay "in private hands." 

That followed remarks by White House press secretary Robert Gibbs on Friday, who said that the administration "continues to strongly believe" that the banking system should stay private, provided they are sufficiently regulated. He repeated Monday that "the structure of (a) privately held system regulated by the government is the best way to do things."

Gibbs' remarks appeared to help banks recover slightly on the Dow Friday, but only after the stocks for Bank of America and Citigroup plummeted earlier in the day. 

Bank of America shares reached a 26-year low of $2.53 Friday, closing at $3.79. Citigroup hit a low of $1.61 and closed at $1.95, down more than 22 percent through the day. Citigroup stock has fallen 90 percent in the last year.

In all, the Dow Jones Industrial Average fell 100 points Friday, closing at 7,366. The Dow plunged another 251 points Monday, though key financial stocks were improving. 

The dive Friday appeared to follow remarks by Democratic Sen. Chris Dodd of Connecticut that temporary nationalization may be in the future, even though he doesn't "welcome" the option.

"I'm concerned we may end up having to do that, at least for a short time," he told Bloomberg's "Political Capital with Al Hunt." 

Near the same time, a reluctant Sen. Chuck Schumer, D-N.Y., told the Huffington Post that nationalization is a last resort if handled correctly. 

"It should be the last arrow in the quiver," he said "Bad nationalization is when the government takes over these institutions and runs them for a long period of time. I don't think this is a good idea." 

Those comments were on top of former Federal Reserve Chairman Alan Greenspan's statement to the Financial Times that bank nationalization "may be necessary." 

"I understand that once in a hundred years this is what you do," Greenspan said. 

But even as the Dow was poised to hit 11-year lows Monday, bank stocks were looking up, after federal regulators announced plans to shore up financial institutions and The Wall Street Journal reported that talks on expanding government ownership were centered on Citigroup, which could end up turning over 40 percent of the company's common stock to the feds. Bank of America is not discussing larger ownership stake for the government, according to the newspaper.

Bank of America opened at $4.29 a share and Citigroup opened at $2.36. Shares in both companies fell through the afternoon, but ended up higher than Friday's close. 

Dave Rovelli, managing director of trading at brokerage Canaccord Adams in New York, told FOXNews.com that the numbers should serve as a lesson to politicians who are talking about nationalization: Keep quiet and let the administration do the talking. 

"Politicians have got to let (Treasury Secretary Tim) Geithner and Obama decide what they're going to do, whether it's right or wrong," he said. "These officials have got to keep their mouths shut. It's the uncertainty that's killing the market." 

Rovelli said a "total disconnect" exists between the White House and those officials discussing nationalization in the media. He said the Citigroup talks, which do amount to "semi-nationalization," along with the administration's announcement has contained some of the speculation and driven down talk that any banks would be 100 percent nationalized. 

The Treasury Department, Federal Deposit Insurance Corp. and other agencies said in the joint statement issued Monday that government assistance is aimed at giving banks "temporary" capital relief. 

"Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands," the statement reads.

The revamped program was announced by Geithner earlier this month, to plow federal money into banks in return for giving the government ownership stakes. Regulators provided some details on that program Monday. 

The new program, like the old one, will allow the government to continue to inject more taxpayer money, or capital, into a bank, in an effort to ride out the financial storm. Of the first $350 billion in bailout funds, $250 billion was used to provide capital injections to banks, including Citigroup, Bank of America and others. But the Obama administration has not said how much of the second $350 billion will be used for that purpose. 

In a new twist, regulators have the option of allowing the government to boost its ownership in banks without having to pour more taxpayer money into them. That would be done through a technical change converting the status of the government's shares in a financial institution. 

"The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth," the statement said without naming Citigroup or any other bank. "Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments." 

The Associated Press contributed to this report.