Economist Dean Baker (Beat the Press, 1/28/09) points to an embarrassingly simple contradiction in the premise of Washington Post staff writer David Cho's worry that government plans to give cash to failing banks in exchange for current investors' shares "could also precipitate a sell-off across the banking system as investors flee, fearing they could be next":
The reason that the government would be injecting capital is that the bank is effectively bankrupt. Shareholders should know if their banks are effectively bankrupt. If they are, then they essentially have an asset that has no value. (In principle, shares of stock only have value if a company's assets exceed its liabilities. If it is bankrupt, then its liabilities exceed its assets.)
It would be a good thing if shareholders paid attention to the financial condition of the stocks they own. (Isn't this what fund managers get paid 7-figure salaries to do?) If it takes government action to get shareholders to look seriously at the bank stocks they hold, then this would be a plus of intervention, not a "danger."
Or, as Baker's own headline succinctly puts it: "Bank Stockholders Lose Money Because Their Banks are Bankrupt, Not Because of Government Capital." Listen to the FAIR radio program CounterSpin: "Dean Baker on the Financial Crisis" (3/28/08)