The stock market is acting as if banks will be nationalized even as the White House tries to end bank nationalization talk.
The White House on Friday insisted it’s not trying to take over two ailing financial institutions, even as stocks tumbled again. On Wall Street, talk of nationalization of Citigroup Inc., and Bank of America Corp., prompted investors to continue to balk, worried that the government would have to take control and wipe out shareholders in the process.
Citigroup fell 20 percent, while Bank of America fell 12 percent in afternoon trading but also came off their lowest levels.
“This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government,” White House press secretary Robert Gibbs said when asked about nationalizing the banks.
“That’s been our belief for quite some time, and we continue to have that,” Gibbs said.
When a reporter suggested Gibbs could do that by saying point bank that Obama would never nationalize banks, Gibbs would not make that statement, but emphasized: “I think I was very clear about the system that this country has and will continue to have.”
Bank Nationalization Fears
CNN Money is reporting Bank Nationalization Speculation Prompts Confusion, Fear.
Speculation about possible bank nationalization by the U.S. government is driving down shares in the sector Friday. However, there’s plenty of uncertainty of what nationalization would actually look like.
Nationalization gives the U.S. government the power to control banks. That power could mean anything from taking control of the public shares to replacing existing management, installing a new board of directors and setting corporate strategy. But the lack of clarity surrounding nationalization has created confusion on what’s the best path the federal government should take.
“One of the problems in talking about nationalization is there is very little consensus on what the word means,” Yves Smith, author of the popular “naked capitalism” blog, wrote in a recent post. “I strongly suspect that the advocates and opponents may have a lot more common ground than they realize.”
There are several questions that need to be addressed before nationalization can seriously be considered, said Michael Shedlock, an investment adviser for Sitka Pacific Capital Management. They include what happens to the government guarantees of bank debt and whether both stockholders and preferred shareholders will be wiped out in a nationalization scenario.
“Unless and until those questions are answered, we cannot know to what extent taxpayers are at risk,” Shedlock wrote on his blog.
Citigroup closed at $1.95 trading as low as $1.61. Bank of America closed at $3.79 having traded as low as $2.53.
Regardless of what Obama says, the market doubts these banks survive.
Mike “Mish” Shedlock
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