Remember when the big banks were bailed out in 2008 and 2009? Well, here is something I’ve occasionally wondered about:
Back in the mid-2000’s, most of the big banks had very similar market caps. Citi, JPM, Wells Fargo, Bank of America, AIG, all had market caps of $200B to $300B. (Leave aside for a moment the fact that AIG is not explicitly a bank – it’s the thought that counts here).
Then the crash happened, and all bank stocks dropped huge, with Citi, Bank of America, and AIG losing 95%-98% of their market cap, and JPM and Wells Fargo losing about 75%. All the big banks received some form of support, with Citi, Bank of America, and AIG being explicitly saved through direct government support. These three also ended up doing reverse stock splits.
Now, once again, all these banks have roughly similar market caps, in the $75B to $200B range.
But if you look at the charts for Citi, Bank of America, and AIG, it shows their stock prices back in the mid-2000’s indicating market caps of $1.5 TRILLION to $2 TRILLION! (JPM and Wells Fargo, since they didn’t do the reverse stock splits, don’t have this weirdness).
How exactly does this work? I know that the government injected huge sums into these banks. But my understanding was that much of this was in loans, which shouldn’t affect their market caps. I’m trying to figure out two things:
1. The current $75B to $150B market caps of AIG, Citi, and Bank of America – what is the relationship between these market caps and the government support they received? I mean what is the mechanism?
2. If, using their new post-reverse-stock split prices, they have these market caps, how is that related to their $1.5 Trillion to $2 Trillion market caps (using the post-reverse-stock split prices) before the crash? In other words, was all that value vaporized during the crash? But that’s not possible, since they never had those market caps in the first place. I’ve tried to wrap my head around this, but just end up giving myself a headache. And nothing I’ve read online has clearly explained all this.
Basically, my question boils down to this: What does market cap actually measure? If you have a company with 1 billion shares and $100/share, then it has a market cap of $100B. If it prints another 1 billion in shares, then it still has a market cap of $100 billion, just now split over 2 billion shares at $50/share. That’s Finance 101.
But these banks printed shares and somehow increased in market cap. At the bottom, in March 2009, I remember that Citi had a market cap of about $5 Billion. Then presto change, they printed a ton of shares and at the same time did a reverse stock split and somehow a ton of market cap value just appeared.
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