TORONTO - Stock markets closed lower Friday afternoon as nationalization concerns about U.S. banks grew in the wake of a deal that sees the U.S. government take a bigger stake in Citigroup, one that could dramatically lower the portion owned by common shareholders.
Traders were also discouraged by a dividend cut at General Electric and greater than expected economic deterioration in the U.S. in the fourth quarter.
Toronto's S&P/TSX composite index closed down 63.8 points to 8,123.02 at the end of a week where the TSX brushed late 2003 lows, but gained two per cent, thanks in large part to better-than-expected earnings from four of the big Canadian banks.
The Dow Jones industrials declined 119.15 points to 7,062.93, its lowest close since April 1997 as it lost 303 points or four per cent this week.
The Canadian dollar was down a fifth of a US cent to 79.6 cents US as Canada's current account balance with the rest of the world fell to its first deficit in nine years - reaching $7.5 billion - in the final quarter of 2008 as export volumes and prices decreased.
The TSX Venture Exchange gave back 1.15 points to 861.66.
Citigroup said the deal will give the U.S. government a 36 per cent stake in the struggling bank as the government, along with other private investors, will convert some of their preferred stock in Citi to common shares.
If the maximum amount of preferred stock is converted, current common stockholders will see their ownership stake fall to as little as 26 per cent.
The deal came just days after the Obama administration and the Federal Reserve said they preferred not to nationalize banks.
"The market was up the last few days because people had less fear about government nationalizing Citigroup and now with this conversation from preferreds to common, it seems to say one thing and do something else," said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier.
"Any of these companies that received government assistance would be suspect."
Investors are deeply concerned about moves to nationalize banks, thinking that such moves create an uneven playing field. As part of the agreement, Citi will suspend dividends on both its common stock and preferred shares.
Unhappy investors sent its shares down 96 cents or 39 per cent to US$1.50.
Shares in Bank of America - another target of nationalization speculation - fell $1.37 or 26 per cent to US$3.95.
The Nasdaq composite index gave back 13.63 points to 1,377.84 and the S&P 500 was down 17.74 points to 735.09, its lowest level since 1996.
Shares of General Electric, a Dow component, declined 59 cents to US$8.51 after it said it will cut its quarterly dividend to 10 cents from 31 cents to preserve cash. The company had already warned that it would be evaluating its dividend level for the second half of the year in light of the growing uncertainty in the economy.
The TSX financial sector lost 3.3 per cent with Royal Bank (TSX:RY) down 98 cents to $30.92 and CIBC (TSX:CM) lost $2.76 to $43.15.
Shares in insurer Manulife Inc. (TSX:MFC) fell $1.28 to $12.90.
The TSX energy sector edged up 0.35 per cent as oil prices held steady. The April crude contract on the New York Mercantile Exchange was off 46 cents to US$44.76 a barrel. EnCana Corp. (TSX:ECA) gained $1.32 to $50.20 and Canadian Natural Resources (TSX:CNQ) declined 76 cents to $40.90.
The gold sector rose 1.1 per cent as the April bullion contract on the Nymex dipped a dime to US$942.50 an ounce. k Goldcorp (TSX:G) rose 55 cents to $36.96.
