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Large Banks and the Bernanke Put Option? | PowerOptions Web Log
On March 10th of this year, Federal Reserve Chairman Ben Bernanke made a bold statement when he declared that large banking institutions will not be allowed to fail. What this has essentially done is put a temporary bottom in the financial market, and gave investors a reason to starting buying shares of some of the large banks. Up until this time, there was a good deal of uncertainty regarding whether or not some of the large banks would be nationalized. The government had already taken a 35% stake in Citigroup (C), one of the largest financial institutions in the country with over 7,700 branches, and investors thought other banks may also fall victim to the same fate. The idea that Bernanke has basically purchased a put option on the large financial companies by making these comments is a fair assessment. In laymen’s terms, a put option is insurance against downward...