Bye-Bye Banks

We all know that our nation’s banks are in deep trouble, but who would have guessed that they might actually go away? This past Sunday on ABC’s program This Week, Senator Lindsey Graham said, “I think if you put most of our major banks under a stress test, they are going to fail. This idea of nationalizing banks is not comfortable but I think we have got so many toxic assets spread throughout the banking and financial community, throughout the world, that we are going to have to do something that no one ever envisioned a year ago…no one likes. To me, banking and housing are the root cause of this problem. But I’m very much afraid any program to salvage the banks is going to require the government. I would not take off the idea of nationalizing the banks.” Need I point out that this is a Republican Senator from the conservative state of South Carolina? Republican Congressman, Peter King of New York, also a guest on the show, agreed with Senator Graham’s assessment. And while President Obama has indicated he does not favor nationalizing our banks, he isn’t taking it off the table either. Senator Graham’s comments received no backlash in the days that followed from either party. The stock market tumbled in the opening day of trading, lead by bank stocks. Translation? The bank nationalization card is in play.

The first $350 billion of bank bail-out funding failed to do the job intended…get banks lending money again. The concern is that the remaining $350 billion will fall far short of what’s needed to resolve the banking industry’s growing problems. What was once primarily a sub-prime loan problem is quickly spreading to prime loans as well. Taxpayers are already angry. My guess is that they will have no appetite for an additional round of bailout funding. Ask for more money and you may see a taxpayer revolt! So what’s the solution? Nationalize the banks. Treasury Secretary Timothy Geithner may have already set the stage. In his rollout plan for rescuing the banking industry, he stated that all banks would go through a ‘stress test’, presumably to make certain the taxpayers are not throwing good money after bad. Suspicions abound that few will be able to pass the test. Assuming most fail, how should they be handled? Certainly nationalization would be one answer. Under a nationalization program, the government would take over the bank, guarantee its bad loans while allowing the bank to tap into the U.S. Treasury for funds needed to lend to worthy customers. If done on a wide scale, it’s easy to see how you could quickly turn the banking crisis around. You get money flowing to consumers and businesses in the form of quality loans and credit while you buy time to work through the backlog of toxic loans.
So what would nationalization mean for bank stockholders? If you own stock in a bank that is nationalized, you would likely lose your entire investment. If you own bank stocks, you will want to watch the development of this situation very carefully. One solution is to place a ‘stop-loss’ trade that would automatically sell your stock should it fall below a predetermined price. This allows you to participate in the upside while protecting the downside stock movement.