The U.S. may have started to "stress test" U.S. banks, but results from Royal Bank of Scotland (RBS) show that the catastrophe in bank earnings may be growing. The British bank lost $34 billion on huge write-downs The firm is now 70% owned by the UK government.
The news means that, no matter what the Obama Administration may say, if its new look at bank balance sheets finds enough trouble in the asset bases of firms like Citigroup (C), the option of nationalization must still be on the table. A loss of tens of billions of dollars at Citi would require such a massive infusion of capital that the government would have little choice other than to take the lion's share of the bank's equity.
The trouble with the new stress test program is that it leaves the Treasury little option other than to tell the markets which banks cannot get along without massive government investments. And, what does it tell investors then? The bank you hold shares in will go out of business? That is, unless, you let the U.S. government dilute you down to nothing.
Douglas A. McIntyre is an editor at 24/& Wall St.