What Would My Investments Look Like if the Government Nationalized Banks?

BY busadmin  February 23, 2009 at 6:30 PM EST

Citigroup; AP photo

Question/Comment: I’m retired and considering investing in Citigroup and BAC.

However, I keep hearing the word “nationalization.” Would my prospective investment be lost should the Government nationalize Citigroup and BAC? What is the likelihood that the Government will nationalize? If the Government only purchases the “Toxic Assets,” in your view, is the loss of those assets already priced in those stocks?

Paul Solman: Now you know, Joe, I’m an explainer, not a stock tout. If my ANSWERS here should be taken with a Lot’s-wife’s-worth of salt (see the introduction to this page, above), my investment advice should be taken with an ocean’s-worth.

That caveat dispensed with “nationalization” can be implemented in various ways. But in the most likely version, yes, shareholders would be “displaced.” Or, less politely, wiped out.

Likelihood of nationalization? Yet again, I fall back on my motto, adopted from John Kenneth Galbraith: “There are two kinds of economists; those who don’t know the future and those who don’t know they don’t know.” But if I had to bet, I’d bet yes.

Is the loss of assets, assuming no nationalization, already priced into the stocks of Citi, et al? In theory, ALL information is already priced into every stock. And if you have “material” information others don’t have, and trade on it, you’re pulling a Martha Stewart. I can’t do any better than the market on this one: millions of people putting their money where their mouths (and minds) are.

In this case, I defer to the wisdom of crowds. And the wisdom of John Bogle, who would say that if you’re going to invest in the stock market, why not do so via an index mutual fund, where you’re diversified and not playing against the crowd’s wisdom.