In case you hadn’t noticed, the bank stocks are imploding.Bank of America smashed through $6 barrier this afternoon and is now in the mid-$5s. Citigroup has been cut in half. Morgan Stanley’s back where it was in the depths of 2009.
Back in the financial crisis—the last financial crisis—the Treasury Department and the Federal Reserve were heavily and obviously involved in trying to make sure the banks didn’t collapse, frantically negotiating behind the scenes and ultimately persuading Congress to approve the TARP.
This time, however, they’ve been silent and invisible.
Oh, of course, the Fed is still bailing out the banks every day with zero-per cent interest rates, interest on excess reserves, and other programs that reward the banks just for being banks.
But beyond that, it’s quiet in Washington.
So you have to wonder… behind the quiet exterior, are Tim Geithner and Ben Bernanke absolutely freaking out?
It’s not clear why the stocks are getting demolished: The banks are supposed to be “well-capitalised” now.Of course, they were supposed to be “well-capitalised” back in 2008, too, and that didn’t stop their stocks from plummeting, and Lehman and Bear from going bust. (Everyone else would have gone bust, too, if the government hadn’t stepped in.) So maybe they aren’t actually well-capitalised.
At least one Bank of America analyst, Chris Whalen, thinks Bank of America is bankrupt—not from over-inflated asset values but from litigation exposure.
Morgan Stanley investors, meanwhile, say they are concerned that the company has enormous undisclosed exposure to Europe.
If there’s one over-arching lesson of the 2008 crisis, though, it’s that no one will ever know how well capitalised the banks are…until it is too late.Either the sentiment will improve and the stocks will go back up, thus leaving everyone wondering what they were briefly worried about. Or the sentiment will continue to get worse, thus leaving everyone to increasingly freak out.
And the lower the stocks go, the more people will wonder what the government can and will do.
And it’s a good question.
What can the government do?
Theoretically, they could initiate another bailout… but if they did that, 50 million Americans would storm the capital with torches and pitchforks.
They could express confidence in the banks’ financial condition… but that would just be a signal for investors to run for the hills.
They could also, in theory, do what they should have done in 2008, which was seize the banks, write down their assets, recapitalize them, and re-float them—without tinkering with their operations. This would be a bold and proactive move, one that would move the economy several steps closer to eventual recovery. It would also trigger screams of outrage (and lawsuits) from banks and bank shareholders and bondholders, all of whom, if the move was done correctly, would lose money. (Equity holders would get wiped out, bondholders would get haircut, and senior bank managers would get fired).
The government now has the authority to seize any financial institution it considers systemically important, and all the banks above certainly apply.
Actually using this authority, however, would require balls of steel.
It’s not clear that anyone in the current administration possesses that.
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