BofA, Citi Show Bank Cash Needs Run Deep

Bank of America (BAC) and Citigroup (C) this week showed that no matter how much aid the federal government bestows on the U.S. banking system, it may not be enough.

Just three months after the Treasury Department bought preferred equity stakes in nine large banks through the $700 billion Troubled Asset Relief Program, BofA and Citi -- each of which received $25 billion from the government -- were forced to take drastic action to recapitalize in the face of big fourth-quarter losses.

BofA needed Treasury to step in with a second investment and guarantee of risky assets picked up in its recent acquisition of Merrill Lynch. Citi, which similarly agreed to second round of federal aid in November, sold a majority stake in its Smith Barney brokerage to Morgan Stanley (MS) and announced a major restructuring plan.

With analysts saying 2009 could be even worse than last year in terms of deteriorating credit and economic conditions that haven't been seen since the Great Depression, Citi and BofA are unlikely to be the last banks to be in search of cash.

"The economic situation is likely to continue to worsen or the next few quarters and my sense is that these large banks are going to be forced to go back to the government, hat in hand, in order to beg for funds in order to survive," says Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners. "The government is in the precarious position of helping these companies for fear of collapsing the whole financial [system]."