by Simon Wright

Created on: February 01, 2009

The current economic malaise has been felt by pretty much everyone but one group who has been hit harder than most is shareholders. Most shareholders have seen a large decline in the paper value of their shares, whether their share exposure is through individual companies or tracker funds. Shareholders have also seen dividends cut or stopped, creating the double whammy of a capital value reduction and a decline in income. Even allowing for the fact that all shareholders have been affected by the recession, there is one group of shareholders that have been particularly affected and that is people who own bank shares.

Having worked for a bank for many years, I fall into the category of people who have discovered just how badly a major recession can affect the profitability and market confidence of seemingly very profitable and safe banks. If we wound the clock back to the beginning of 2007, very few people would have predicted that major banks, on both sides of the Atlantic, would have gone bust or have faced the embarrassment of having to go cap in hand to shareholders to raise extra capital through Rights Issues. That is exactly what has happened, in some cases, and it hasn't stopped there. With countless billions written off the balance sheet, due to toxic debt, even the injection of Rights Issue capital hasn't been enough in some cases. This has left governments in an extremely awkward position. Do they let major banking institutions go to the wall or do they step in and prop up the banks, at considerable cost to the taxpayer? In most cases, so far, they have decided to bite the bullet (and the political brickbats) and have stepped in to part-nationalise the high street banks.

A couple of examples, in the UK, have been Lloyds Banking Group and Royal Bank of Scotland. Lloyds TSB were asked to step in to rescue another stricken Scottish bank, HBOS, but have subsequently floundered with their capital ratios worrying low. As a result, the government now owns part of Lloyds TSB. Additionally, they've had to take a 70%+ stake in another historic bank, Royal Bank of Scotland.

The biggest fear for shareholders of these institutions is that it could end up in a full nationalization. In that case, the banks would cease to trade on the stockmarket. They would be wholly owned by the government and shareholders would find that their shares would be worthless. Of course, this is the last thing that the government wants to happen as it would be extremely unpopular. So far,

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