Tuesday, October 14th, 2008
While the short-term thrill of a gusher of cash is understandable, investors have to be fundamentally concerned at the nationalization — apparently forced in some cases — of some of the linchpin institutions of America’s economy. There are a couple myths to be dispelled:
* “This is not costing shareholders’ money, because the government is just getting a preference share and shareholders aren’t being diluted.” Shareholders’ voting rights may not be diluted, but they are getting less of the banks’ profits than they expected.
* “This happened in prior bailouts.” In fact, the FDIC has in the past been scrupulous about obtaining shareholder approvals for partial nationalizations. Here’s Irvine Sprague, chair of the FDIC at the time, on the government’s takeover of First Pennsylvania in 1980:although it may not have been legally required… the only fair thing to do was to give the shareholders a vote on the plan. They were going to take the hit if we put the plan into effect. Beyond fairness we … knew that full public disclosure and a shareholders’ vote was the best eefense against any possible lawsuit.”Meanwhile, two of the banks that did not need the government’s help are trading up. Wells Fargo is up 7.5% at $32.7 and JPMorgan is… ahh JPM is actually down 3% at $40.6. Guess JPM’s shareholders are smarter.