Investment Savvy DUers: Against my advice, someone close to me purchased BofA stock

[Mike 03]

today.

Hypothetically, if the U.S. government steps in to temporarily nationalize or "rescue" this bank, what happens to the shareholders?

Thanks in advance.

EDIT: Mis-spelled "savvy". I knew I mis-spelled it. This is how agitated I am. I'm shaking in anger.

[marketcrazy1]

1. they get wiped out

common and preferred would likely be ZERO!!!

[Mike 03]

7. That is what I though the answer would be.

Jesus Christ... That is what I told him!

[rpannier]

13. According to CNN

they lose it all

[ThomWV]

12. No they won't

The guy probably made a good buy.

[Cronus Protagonist]

2. Did we just become FR for a moment here?

Do you really, truly think that the Obama administration will take your friend's money as a shareholder? Really?

[Mojorabbit]

5. The answer given was correct. nt

[Mike 03]

8. I would never blame President Obama. This is how it always works.

It was this way with Worldcom, Enron...

[remedy1]

3. They get wiped out.

If the bank is taken over by the Govt. all shareholder equity gets wiped out.

Buying BAC stock is risky right now. Better to short it.

[marketcrazy1]

10. not enough meat on the bone to short

IMO... if your friend bought today then there is nothing to do but hold and pray! buying today at these prices was a risk BUT it could turn out to be an OK trade IF they do not take them over this weekend, I dont know what your friends risk tolerance is but if this was an impulse buy I would strongly suggest setting an exit point now and stick to it!!! as the saying goes, it`s not what you leave on the table but what you take off that counts.... IOW you can`t spend paper profits!!

[Warpy]

4. Shareholders are temporarily wiped out

until and unless the bank moves out of nationalization to become a publicly held company.

One hopes any nationalization contains the proviso that the bank will move back into the private sphere as soon as its asset to debt ratio allows it to do so.

[marketcrazy1]

14. if they nationalize

common and preferred WILL be wiped out PERMANENTLY. if and when they go public again, NEW shares would be issued. old shares would be toilet paper......

[depakid]

23. Anyone wanting to see what may happen need only look at the RTC

Economist Dean Baker explains:

The S&Ls were taken over by the government and then resold to the private sector. These were bankrupt institutions that were put out of business. The stockholders were wiped out, which is what is supposed to happen to stock holders when their company goes bankrupt.

But this is not what happens in the plan being discusses. In this plan, the taxpayers just do the banks the great favor of paying above market prices for their junk so that we can relieve them of the burden of their past mistakes. The taxpayers get to eat the losses and the bank executives and their shareholders go on their merry way.

These folks are not market fundamentalist types. The Wall Street view of the world, and apparently the view of at least some people in the Obama administration, is that the government always is there to help a bank or banker in need.

The idea that we would give one more penny to this crew that has wrecked the economy should make taxpayers furious. There is a legitimate public interest in keeping the banks operating; a modern economy needs a well-operating financial system. But, there is zero public interest in rewarding shareholders and overpaid banks executives.

These executives bankrupted their banks and brought the economy down with them. They belong in an unemployment line not collecting multi-million dollar paychecks in their designer office suites.

The obvious answer is to take over the insolvent banks, just as we did with the insolvent S&Ls. The government should form an RTC as we did in the 80s, which would dispose of the assets over time, collecting as much money as possible for the government. The bankrupt banks would be restructured and sold back to the private sector as soon as their books were straightened out. The point of the exercise is not have the government run the banks, the point is to keep the financial system running without giving even more money to the richest people in the country.

This is the only reasonable solution to the mess that the bankers have created.

http://blog.usw.org/tag/resolution-trust-corp/

[kirby]

6. Sounds like your buddy likes to gamble...

Personally I wouldn't touch bank stocks with a ten foot poll right now. They are sitting on massive hidden problems.

I would say in most environments the shareholders, rightfully so, would be left with nothing. They are the one class of people who took a risk directly related to how the company they partially own is run. They get the downside/upside. Probably the only people protected would be senor bonds or certain preferred stock. It is all a guess on my part. In the most recent cases, the companies issued warrants to the US Gov't so the Gov't has part ownership. That dilutes the existing stock value. Overall I would say it is just Vegas Crap shoot at this point.

[Mike 03]

11. Naw, he's loaded up on painkillers and he's been buying stupid ass stocks lately.

This is my argument:

If he absolutely feels the compulsion to buy stocks, there are much, much better gambles right now, like mining, infrastructure, foreign currencies, agriculture.

It breaks my heart, because he used to make much wiser decisions. I know it's the drugs he is on to stop his pain. But he's throwing money away.

[kirby]

18. If I were to buy...

Personally, if I were to be buying stocks now, I would stick to broad diversified stuff like the S&P 500 (Spiders). That way the risk is spread out over 500 companies, not just a single company. However, all my money is parked in Treasuries. I guess I'm just a chicken.

[AlCzervik]

9. i'll let you know, we bought some when it was about $5 a share.

not my pick btw. We aren't big investers so it won't wipe us out, we're stupid but not that stupid.

Not my pick!

[Coyote_Bandit]

15. Depends

on how it's done.

Shareholders have an ownership interest unless it is bought out or liquidated in bankruptcy.

However, it is also possible for that ownership interest to simply be diluted.In such a scenario, addoitional shares might be issued and held by the government. Presumably if the company were nationalized then the dilution would be at least 50% in order for the government to take controlling interest. More likely it would be something more on the order of at least 60%.

[taught_me_patience]

16. The common will be distroyed.

Your friend is seriously playing with fire. He/she should buy a financial ETF if they believe in the sector. It spreads the risk around.

[On the Road]

17. Depends on How It's Done

TARP investments obviously didn't go there, but there is indeed a good chance that another government intervention would wipe out stockholders.

On the other hand, it's not an unreasonable speculative play if your friend knows what he is doing. If BoA survives intact, he could easily see 1,000% gains or more. It just has to be done with a small enough position of discretionary funds, and with a level head rather than double-down desperation.

It is a tempting speculation. Although a safer bet might be UYG, which covers the entire financial industry and spreads out the risk.

[Best_man23]

19. Expansion on the answer (its correct BTW)

In a nationalization the common stock bites the dust, preferred stock offers a little more protection. Ideal positions on BAC would be to hold individual bonds or short the common or preferred (shorting is NOT recommended for anyone who does not understand options).

If these instruments were playing cards, they would look like this in a nationalization situation:

Bonds = Face cards (Ace, King, etc)
Preferred = Number cards (10, 9...except 2 of Clubs)
Common = 2 of Clubs

Any investment in BAC (or CIT for that matter) common or preferred should only be done with SPECULATIVE money, that is, money that if the stock goes to ZERO, its not going to change how you live your life.

[DFW]

20. 5 years ago, I bought gold

Against all logic, I just couldn't see putting some bucks I got in a small windfall into
anything else. Gold was $425 an ounce, and I bought old American $20 gold pieces at $465.
Gold is now at $990, and the coins are at $1300. I don't know how much higher they have to
go, but they don't scare me as much as BofA stock, so I'm still holding--against all logic
I was spewing out during Clinton's presidency (I view the current economic mess as a delayed
effect of the Cheneybush presidency). Gold pays no interest, you can't eat it or live in it,
or drive it anywhere, or heat your house with it. On the other hand, so many people still
see it a store of value (for whatever reason, other than tradition, I'll never know) that
the validity of it as an investment can't be denied.

[kirby]

21. Gold may just be the next bubble... n/t

[DFW]

22. If there's any logic to the world, it should be

But since when has there been any logic to the world?