Old 02-21-2009, 02:56 PM
Senior MemberCaptains Club Member
Join Date: Aug 2003
Location: Out west
Posts: 3,298
Default RE: Help Me Understand This Bank Bailout Thing

Hello Eyeball,

Their market capitalizaiton, the value of all shares outstanding, at today's very low prices represented the ownership value to the shareholders. (BTW--if either survive intact, buying now will yield a bushel of money later to buyers)

The US government "loaned" in excess of the current market cap to these banks. The banks owe the US gumment back, and hence these loans are liabilities. If the companies go under (aka bankruptcy) then the banks and us taxpayers lose everything. The "loans" become worthless, as well as the market cap. The loans will be repaid first on cents on the dollar liquidation of any assets the bank has.

As pointed out by a previous poster, these banks have balance sheets where liabilities currently exceed assets. It is interesting, that these banks are currently making lots of money. Their problem is, the amount they are making is being mopped up by their previous losses coming due, and the burden of interest they owe their debtors. They own securitized paper that is based on real estate that has little to no current market value. This is what bankrupted Lehman and Bear Stearns, and would have taken Merrill Lynch under had not B of A purchased them.

Hence the spurious notion....."too big to fail." I'd like to see these banks make it. It would be a great turnaround story. Plus, the taxpayers would get a decent to great return (8%) The "stock market" is betting against this happening, and that's why Citi has lost 91% of it's stock value. Short sellers are also driving down the market. Kind of like the reverse when they were bidding oil futures contracts so high recently.
dssmith is offline