Twenty Something Sense

On Thursday, a former guest blogger and current Bank of America employee forwarded me a blog post that explains why nationalizing our countries banks would have profound effects on everyone. I found the post to be a very informative read and I recommend it to anyone who wants to have some basic dinner table knowledge on the subject. However, there is one part that I disagree with:

A government takeover would vaporize a lot of wealth.
This is why the markets freak out every time there’s a rumor, or a rumor of a rumor, about nationalization. If the government took over a bank, public shares would suddenly be worthless and shareholders would lose everything. With Citi and Bank of America shares down more than 90 percent over the last 12 months, many shareholders have already lost a fortune. But there’s still a chance they’ll get some of it back if the bank recovers. That potential upside would disappear if the feds stepped in.

Even worse, the banks’ bondholders and other creditors could lose a bundle too. Same with depositors and institutional customers whose account balances exceed the amount guaranteed by the FDIC. To prevent a panic, the government would probably cover those stakeholders up to a certain level – with taxpayers footing the bill once again.

If a bank has failed: Why do any of the equity holders deserve a penny? Why do the debt holders deserve anything near par? Why are people who have uninsured deposits deserving of cash they knew was not insured?

The equity holders and creditors of a bank deserve no more than what those would get who invested in another failed company in a different industry. I’m tired of the government not forcing consequences on the people who made bad decisions.