In this example, a bank that currently has a market capitalization of $40,000 in the stock market due to concerns about possible bankruptcy and/or nationalization probably has an intrinsic value of more than $85,000 -- more than 100% higher than the current quoted price.
Several important conclusions can be drawn here:

1. The NPV of the vast majority of banks in the US is highly positive, with some exceptions. Absolutely no taxpayer bailout of common shareholders is needed. Current bank equity shareholders are, on the whole, perfectly capable of assuming the losses that were generated by them. All that’s needed is a set of accounting rules that allow banks to work off their losses over time.

2. Nationalization isn’t necessary to a well-functioning banking system. The financial intermediation infrastructure in the US in terms of technology and human capital is intact. As long as banks aren’t forced to write down their assets all at once, the vast majority of banks can operate profitably, collecting deposits and expanding credit.

3. Provided that the government doesn’t impair the intrinsic value of the banks through unsound policies such as nationalization or cram-downs at distressed prices, it might make sense to consider some limited investments in select bank stocks. Many of these banks are trading at values well below their intrinsic values. And we should be expecting Geithner and his team to be searching for ways to boost equity-market valuations, since wealth levels have a direct bearing on consumption, investment and overall economic activity.

4. The problems that have arisen in the financial system can be solved with provision of adequate liquidity and by reform of bank accounting regulation. The Fed has already taken care of the liquidity problem. Now the authorities need to take care of the accounting issue so that banks can resume lending and rebuild their equity bases.

5. The specifics of the regulatory provisions that would allow banks to charge off non-performing assets over a number of years need to be worked out by regulators - and there are so many viable approaches to resolve this issue that it’s really no obstacle at all. For centuries, banks have carried assets on their books at acquisition value. There’s no reason why they cannot be allowed to do so again.

In terms of the criteria and timing of how losses are recognized, this is also an eminently soluble problem. It’s regulators’ job to create rules to determine how companies value their assets - which may have nothing to due with their current market value. This is just one more such task.

6. There’s still no such thing as a free lunch. Bank shareholders should be made to fully absorb the losses incurred by the banks they own. But there’s no need for taxpayer bailouts, and there is certainly no need for nationalization. The reality is that the future cash flows of most banks are so great they can cover all losses and still leave plenty of value for shareholders. In fact, the NPVs of such residual cash flows are so attractive, it makes sense to buy select bank shares at current prices.

Editor's Note: Minyanville believes that the friction between opinions is where true education lies and with that in mind, we offer "the other side of this trade" from Minyan Peter.