Monday, October 13, 2008

Dilemma (Con't).

If I were the investors of the bank, and with the information that the government will take over, what will I do?

The government invests on the banks to provide capital to polish the balance sheet. It also lowers the volume of available shares in the market (and hence drive the price up, or at least stop tanking of the stock price, and hence the book value of the equity). However, whichever bank accepts this investment gives the signal that it is in deep problem. The larger the amount, the bigger and deeper the black-hole. In case the black-hole is too large and deep to be saved, under the consideration of stopping panic, government may take-over the bank to continue its operation and prevent massive withdrawal. But, government will not simply just eat the rotten tomato, and there may not be just one rotten tomato. Merger and buyout, under government's guide, will happen when situation "stablizes", or on the contrary, may happen immediately to avoid further worsening. Restructuring, in the company and in the market, can be expected. Job cut by these banks may not happen immediately (or the panic will continue), but it will continue after the panic period, after restructuring takes place.

Go back to the question: if I were the investor, what will I do?

In case I look for long-term investment return, I will not dare to invest on them at all. In case I hold shares of them, even at a low price, divest them. Even though there may be a chance of its survival, and, after restructuring, its result will improve and hence its stock price may increase again. However, there are too many uncertainties. Particularly once government takes over the ownership, the transaction terms and deal will no longer be a purely commercial decisions. Chances are transferral at a premium (especially if transaction takes place among "natoinalized banks") and the acquirer will have to take a heavy burden for a few years before full recovery. During the same period, one may find other more transparent and market based companies to invest on. At worst, receiving interest through the shamed deposit rate is still better than exposing to another 10-20% downside risk. Opportunity is always there; just whether or not one grasp it when it is there.

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