Thursday, January 22, 2009

Bank Madness!

This post got featured in the Carnival of Financial Planning. Check it out!

So lately you have seen bank stocks plummet. Many of you may be confused as to why because bank CEOs and financial analysts have been saying that the banks are financially sound. You have even seen Bank of America, the largest bank in America buy back shares, a move done when management feels their shares will go up. So if there seems to be so much confidence in the banking system, then why, are their shares dropping? Because of what investors do not know. Investors do not know if the government is going to inject more capital into banks and end up nationalizing them. We have already heard talks of this happening in Europe, where the governments of the European Union have said they are considering nationalizing their banks. And after Meredith Whitney, from Oppenheimer & Co. came out earlier this year and said banks would need to raise more capital in 2009, the fear of nationalizing banks has spread to America.

So what if the banks are nationalized? If the banks are nationalized, all your shares in the bank will be worth nothing. You will lose your investment in the bank, hence why shares have fallen so drastically, no one wants to own them. Additionally, as the government injects more capital, they also make more rules on how the banks can spend it, and in essence, run their business. Investors do not like all the rules that the money banks are forced to take are coming with.

If you think the banks will not end up being nationalized, they might make a good investment. The managements of banks are claiming they are solid, and the analysts following them agree. If you are to invest in a bank, invest in a larger one like Bank of America or Wells Fargo. These banks are large enough to make it through these tough times. Additionally, Tim Geithner, the new Treasury Secretary, said he was against nationalization of the banks, instead he wants to seek private investment into the banks. Banks have been rattled by this fear and are trading at extremely low prices, if Geithner follows through with his statement, you could make a lot of money when the banks return to prosperity. If you are going to invest in banks, wait until we get a better picture of what team Obama is going to do. Let the new stimulus package go through talks with the GOP, because it will surely be changed to please both parties.

If however, you think that the government is going to take over one of the banks, stay away, you risk losing ALL your money.

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