Bank Stockholders Lose Money Because Their Banks are Bankrupt, Not Because of Government Capital

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The Post tells readers that a problem with a bank rescue plan that injects capital in exchange for an ownership stake, and effectively wipes out the stake of current shareholders is that "the government could also precipitate a sell-off across the banking system as investors flee, fearing they could be next." The reason that the government would be injecting capital is that the bank is effectively bankrupt. Shareholders should know if there are banks are effectively bankrupt. If they are, then they essentially have an asset that has no value. (in principle shares of stock only have value if a company's assets exceed its liabilities. If it is bankrupt, then its liabilities exceed its assets.) It would be a good thing if shareholders paid attention to the financial condition of the stocks they own. (Isn't this what fund managers get paid 7-figure salaries to do?) If it takes government action to get shareholders to look seriously at the bank stocks they hold, then this would be a plus of intervention, not a "danger."

--Dean Baker

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