Bank Nationalization Moves Closer

With the drop in bank stock prices today, Citi and Bank of America both lost about 20% of their value, it will not be long before nationalization is inevitable. Two key Senators, Dodd and Schumer, both have made comments today that they could see nationalization as a distinct possibility. Meanwhile the market is surely signaling that it too thinks it is just a matter of time. Last week I thought bank stock prices were too high given that many of them are technically insolvent. That there was any price at all for Citi [as an example] was clearly a sign that the market still believed the Administration’s protestations against nationalization. This allowed a premium to remain in the stock prices – aka ‘The Geithner Put Option’. Now the conversation has altered radically and the premium is being drained away.

The ‘tell’ here is Schumer’s dramatic change of mind. His position is almost opposite the one he stated only a week ago. Back then he was adamant that government should not nationalize, because it is ‘bad at these kinds of things’. Now, apparently it is up to speed. Or maybe someone gave him a big hint to get on the right side of this argument?

Clearly the administration cannot announce anything explicit, since to talk openly about nationalization would precipitate a collapse in stock prices and force its hand. It needs time to organize. How much time? With the banks already insolvent it is more a matter of lining up replacement managers and getting the legal ducks in order than having to cross a tough policy bridge. So not much time at all.

But the day of reckoning is arriving fast.

These are odd times for the world’s largest capitalist economy.