Friday, January 11, 2008

Nationalization of the Banking System

We are starting to see the first steps in nationalization of the U.S. banking system. Large institutions are being "cajoled" into buying smaller ones. They could wait for bankruptcy to buy the assets, which would be smart, but they aren't as I believe the show is worth much to Washington: it is very important that equity investors be calmed by that stabilization effect.

No matter. As the bad assets are pooled we will eventually see some type of government bailout or quasi-nationalization of the banking system. Banks literally have no capital left.

Stay the course. Risk is high. We will be seeing many more "interesting" things from government as it becomes a larger and larger part of the economy. But remember, stocks are options on profits. The real owners of companies are bondholders who always get paid first.

When companies raise capital at 12%, like Citigroup (C), profits go away. When the government steps in, profits go away.