Rumors about 'stress tests' raise issue of bank nationalization, again

Several major news organizations are reporting that about ten of the 19 banks that have gone through government "stress tests" will have to raise capital.

Most analysts already believe that Citigroup (C) and Bank of America (BAC) are on the list. Because of their sizes and current market caps, even if the government has to provide $10 billion to each, they may be able to keep 50 percent of their shares in the hands of private investors.

But several of the banks are small enough that if they have to raise even modest sums, say $2 billion, and cannot find private capital, they could face government ownership of over 50 percent.

According toReuters, "Banks found to be in need of more capital will have to embark on a recovery plan that could involve converting preferred stock, raising fresh private capital, or accepting government help."

Regions Financial (RF) is an example of a bank that could end up being controlled by the government, especially if it fails the "stress test." When its stock was recently trading at 52-week lows, the bank's market cap was only $2 billion. If it has to turn to the government for new capital, current shareholders could easily be diluted down below 50 percent ownership.

And Regions is not the only modest-sized bank on the list.

Douglas A. McIntyre is an editor at 24/7 wall St.

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