Krugman points out than until recently bank share prices reflected the hope that the Feds would bail out the banks -- and stick taxpayers with the bill.
Now that it's becoming clear that shareholders will get stuck with the bill, bank share prices are returning to a rational level. Meaning about zero...
So everyone agrees that fears of nationalization are driving bank stocks down. That’s probably true, but those fears have to be carefully interpreted.
We are not talking about fears that leftist radicals will expropriate perfectly good private companies. At least since last fall the major banks — certainly Citi and B of A — have only been able to stay in business because their counterparties believe that there’s an implicit federal guarantee on their obligations. The banks are already, in a fundamental sense, wards of the state.
And the market caps of these banks did not reflect investors’ assessment of the difference in value between their assets and their liabilities. Instead, it largely — and probably totally — reflected the “Geithner put”, the hope that the feds would bail them out in a way that handed a significant windfall gain to stockholders.
What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded — namely, ownership.