Wall Street in Wonderland

Growing Worry on Rescue Takes a Toll on Banks (Eric Dash, NYT) reads the headline emblematic of conventional wisdom as "fears of nationalization and of Washington’s ever-changing plans for the nation’s beleaguered banks have sapped investor confidence in the industry."

The banks want the taxpayers' money, but the taxpayers, even temporarily, ought to have none of the prerogatives that ownerships confers, say the large investors.

That's not a winning political slogan, and Obama should hit this nonsense out of the park, soon.

So a little perspective is in order, go Krugman:

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.