The market reaction to Timothy Geithner’s bailout non-announcement was swift and severe — uncomfortably reminiscent of the last time a Treasury secretary rolled out TARP. Not only did the weakest banks like Citi (C) and Bank of America (BAC) get slammed, but their credit default swaps widened as well, suggesting the sell-off wasn’t just a buy-the-rumour-sell-the-fact kind of reaction. Yesterday’s nervousness was palpable, just by looking at the sea of red on any quote screen.
The bottom line is that despite the Administration’s efforts to maintain the status quo, the markets won’t necessarily cooperate. If BofA doesn’t immediately stabilise again — perhaps just on some hope that the toxic assets issue will be resolve favourably — it may face the nationalization question again, especially if things deteriorate on a rapid timeline.
That’s the great thing about markets. Politicians can talk all kinds of soothing nonsense about transparency, accountability and confidence, and some of that stuff works pretty well with voters. But the reaction from industry is immediate, and investors are in no mood for jargon. Unless a real bank plan is unveiled fast, the nationalization question is bound to come back.