Recapitalization Tracker

They may involve the antithesis of free market principles, but during times of crises bank recapitalizations have historically proven to be a vital step in ending financial panics.

So, once again let's turn to the bank crises database put together by the IMF and see what happened to stock markets after a recapitalization plan was announced. As I wrote earlier, there have been five cases since 1970 in which the feds stepped-in to buy preferred shares and attempt a rescue of the financial system: Finland, Jamaica, Japan, Norway, and South Korea.

The following chart shows monthly returns for three of those nations' stock markets before and after an injection plan was first announced:

Except in the case of Norway, equities experienced a significant drop prior to bank-rescue plan announcements. South Korean stocks roared in the next year, climbing 200 percent. But you'll notice that the surge didn't start until October, five months after South Korea's government said it was going to fix the country's chaebols, or huge multi-industry conglomerates. That's because October was also the month in which neighboring Japan announced its own bank rescue in the aftermath of the East-Asian financial crisis and Japan's own years-long economic swoon.

Both South Korea and Japan's programs also highlight the potential pitfalls in bank recapitalization programs. Japan propped up a number of banks that should've been dissolved or sold off while risk aversion grew in South Korea and reduced long-run growth prospects.

Norway's longer recovery was likely related to an international wave of currency speculation that reached the country in the fall of 1992. Rate cuts and the eventual dropping of the fixed-exchange rate on the kroner helped equities in Norway recover by 1993.

Which path is the U.S. most likely to follow: Norway's cold, Japan's medium, or South Korea's hot? Based on IMF projections for the U.S. of 0 percent GDP growth in 2009 followed by 2 percent and 3 percent in the next two years, some combination of Norway and Japan seems most likely.