Prospect of nationalizing banks weighs on investors
— -- Investors accustomed to worrying about the usual things, such as earnings and valuations, have a bigger concern at the moment: the future of capitalism.
Debate over whether the government needs to take over the banking system continues to weigh on investors already rattled by sell-offs, including Friday's 100-point sell-off of the Dow Jones industrial average to a 6½-year low of 7366.
The nationalization issue is likely to be a key driver of stocks this week as the possibility of the government taking over the banks in some fashion "is very real," says Robert Maltbie of Singular Research. "The government must step in."
Nationalization rumors began when Senate Banking Committee Chairman Chris Dodd, D-Conn., said banks may need to be taken over temporarily. White House press secretary Robert Gibbs Friday attempted to douse the idea, saying the Obama administration believes "a privately held banking system is the correct way to go." In a statement, Bank of America CEO Ken Lewis said, "We see no reason why a company that is profitable with strong levels of capital and liquidity and that continues to lend actively should be considered for nationalization."
But investors continue to punish the stocks. Shares of Citigroup fell 22% to $1.95, while BofA lost 4% to $3.79.Investors remain spooked about the nationalization debate because of:
•Uncertainty over the government's plans. Efforts to prop up banks so far have merely consumed additional taxpayer money without stabilizing the banks, Maltbie says. Investors want to see the government take action and assume control of the banks without hurting the system. "Let's get it over with," he says.
•Potential further damage to stockholders. Investors have already suffered mightily. Citigroup and BofA are down more than 90% from a year ago.
Still, banks need large sums of additional capital to remain solvent, says Rod Smyth of Riverfront Investment Group. This extra capital will likely come from taxpayers who will demand better terms for the government at the expense of the banks. There will be little pity for bank stockholders, Smyth says. "If you're the shareholder ... it may be a very long time before you get paid back anything."
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