Truth About Value

Members of the media are artificially distorting the debate about bank nationalization. Recently articles have claimed that discussions about possible bank nationalization are depressing the stock prices of several troubled financial institutions. While technically correct, this view point is very misleading.

Several big banks (Citigroup, Bank of America, etc...) are currently in terrible shape. Even after huge capital injections from the federal government they are still in trouble. If the government had not used TARP and other tools to prop up some of the worst-managed banks, they would have gone bankrupt months ago. Without a new round of bailouts (through direct capital injections or indirect injections by purchasing toxic assets for more than they are worth) most of these banks will go bankrupt.

As a result, the stock from these banks are currently worthless. The companies are insolvent. Their debt is greater than the value of their assets. The only reason these stocks are currently worth anything is that some traders are betting that the government will provide them with billions of more dollars. It is not the talk about nationalization which has sent prices down, it is the lack of talk about more bailouts. In fact, it was only earlier talk about massive bailouts which has kept prices artificially high.