Commentary: Why Bernanke Moved Markets
By: We on Power Lunch were all transfixed during Sen. Corker’s questioning of Federal Reserve Chief Ben Bernanke Tuesday.
In response to one question from the senator, Bernanke said the following: “It is not nationalization because banks would not be wholly owned or probably not even majority owned by the government. The government would be a shareholder along with private shareholders.”
This is likely what pushed the market higher because up until now, many market participants feared full government ownership was a possibility, and would wipe out the shareholder.
As a result of Bernanke's comments, financial shares are rallying sharply. Citigroup is up 12 percent , Bank of America is up 20 percent , Wells Fargo is up 16 percent , Goldman Sachs is up 14 percent , Morgan Stanley is up 14 percent . And the Philly Banking Index, the BKX, is up 11 percent.
This dovetails with something my colleague Charlie Gasparino is reporting—that the government could take up to a 40 percent stake in Citigroup by converting a portion of its preferred shares to common shares.
Is 40 percent a lot? Yes, it sure is. But the government owns so much preferred stock in Citi ($45 billion) it could own a lot more and virtually destroy the shareholder. That’s what investors feared, but Bernanke seemed to take that scenario off the table.
If you want the basics you can stop reading here.
If you are really into the math of it all, there are a couple of ways to think about this. (And in the following scenarios I am forced to make some assumptions.)
Right now, the market cap of Citi is $13 billion, which means the common shareholders own $13 billion worth of common stock. If the government converted all of their preferred stock at market price, they would own $45 billion worth of common stock.
That pushes Citi’s market cap to $58 billion. ($13 + $45 = $58)
Then the government owns $45 billion out of a $58 billion company, or roughly 77 percent.
There have been leaks that the government would pay what the stock was worth as of Feb. 9. For Citi, that’s nearly $4/share. Under that scenario, if they converted all their shares, the government would own roughly 67 percent.
But like I said, Charlie Gasparino says the government stake likely maxes out at only 40 percent. This coincides with what Bernanke said today in front of Congress.
Is this confusing? Don’t worry about it. Here’s the bottom line: Bernanke seemed to eliminate wiping out the shareholder. At least for now. But we still have to hear from the horse's mouth, Secretary Timothy Geithner.
More from Michelle Caruso-Cabrera:
- Bernanke to Santelli: Save the Neighborhood
- Bernanke's Slip May Have Caused Bank Share Tumble
- The Unintended Consequences of Gov't Intervention
- Housing Plan: A Break For Those Who Least Deserve It
- Housing Plan: A Break For Those Who Least Deserve It
