Investors cannot shake the fear that the US government will seize control of a Big Bank, but experts do not believe that will happen.
The word “Nationalization” puts fear in the hearts of bankers and their equity and debt holders like no other word.
The fear of such an event over the past few weeks has caused a lot of speculation that the US government may have to seize control and management of one or more of the country’s largest financial institutions.
This is the worry that has sent bank stocks into a death spiral, as shares of some of the biggest banks, including Citigroup (C), Bank of America (BAC), and Wells Fargo have been hammered in a big way.
Some have come back a bit but most big bank stocks are still trading well below where they started the year. Investors are concerned about the huge and continually mounting losses incurred by Citi and BoA, plus the continually rising amounts of taxpayer money that the government is committing to support them.
It is worse in the UK, as the government there may have to fully take over Royal Bank of Scotland (RBS), and that has further fueled the speculation in the US. It is hard to imagine the venerable RBS reporting a loss of more than £20B, US$30B, for 2008, that is the largest loss in British corporate history.
Some of the other EU countries have already moved to assume control of their financial institutions, including Iceland and Ireland. Last week Ireland took over Anglo Irish Bank because it was on the verge of collapse.
However, regulators in the USA have been averse to the idea even though they have and continue to pump billions of US$s into banks, brokerages, and the broader financial system, noting that there is a clear difference between government investments and government control.
“The key to nationalization is that the government actually owns and runs the institution, but so far that is not what they are doing in the US,” said James Barth, a professor at Auburn University, who also serves as a senior finance fellow at the Milken Institute, a nonpartisan economic think tank. “The US is a long way from that sort of model.”
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