The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention. But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.
The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.
All these things have been conveniently forgotten in the avalanche of bailouts - if you keep piling one on top of the other, people forget the older ones.
Last night I was reading up on the $50 Billion in handouts ($10B to the top 6 banks) we will be giving the banks so they will modify mortgages. [Treasury Saving $10 Billion for Big Banks to Modify Loans] It is quite hilarious really - because (a) if these loans deserve modifications the banks, looking out for their self interest, would modify them and (b) the language in the handout....err, bonus is bordering on ludicrous. If you want to see how much of a fraud... err, how leniant the program is here is the salient point.
Treasury says this....
for modifications that have long-lasting success
According to my reading do you want to know what long lasting entails? A modifcation where the payer keeps current for 5 years? Nah. 2 years? Nah. 1 year? Nah. 9 month? Nah. 6 months? Nope. All it takes is the modification to work for 90 DAYS. And the banks get paid off. So if we can forestall a delinquency for a whopping 3 months; we will hand off $50 Billion to banks. That's the deal. That's "long lasting success" in corporate socialism.
But I digress.
Resistence is futile - you will make the banks profitable whether you like it or not. We now are in the era where old loans are forgotten (wink wink) - its only about current loans. The past is the past, who cares what is on the balance sheet - and even if we did care we've marked it up to what we think is appropriate (see FASB changes). Sure the government will do the stress test results (insert chuckle here) where we'll all pass, and maybe Citigroup (C) will be forced to jettison some loans to make the PPIP program not look like the farce it is, but the biggest financial problem in 80 years has been solved. Just like that. Don't argue. Everyone is ok with this system, so I too am now ok with it. In fact I'm gleeful.
So I am going to be an investor in banks. Because old loans no longer matter - and if they ever cause trouble, straight to the Federal Reserve balance sheet they will go (or stay)... or sold off to some investor with the taxpayer taking 95% of the risk. And new loans are made with 0%ish money and 0%ish+anything terms. It's a win/win for all of us.
I've owned BB&T (BBT) and PNC Financial (PNC) in the past as super regional banks - maybe I will buy them back, maybe not. I was too early buying them last time around because the government largess at the time was a fraction of what it is now. I've listed a lot of the national and super regional banks below in terms of performance over the past month
(click to enlarge)
As we can see the great irony is "worst is best" - BB&T is the "worst" performer because it's been among the most conservative, HCBK is a smaller conservative outfit I threw up here (it's not of the same ilk as the rest) to see how it's performed - 2nd worst. Then comes Buffet backed US Bancorp (USB) at only 30%.
Wells Fargo (WFC), PNC Financial (PNC) and JPMorgan (JPM) make up the middle group - all considered to have good managements, but obviously some risk to them (under the old methodology where balance sheet mattered) No longer an issue - and all are up about 40% in the 1 month period.
Of course at the top are the real winners - Bank of America (BAC) and Citigroup (C). They are up much higher in the 6 week period, this is only a month's return. With the huge Countrywide portfolio Bank of America is really going to be minting wins in the refinance boom since all the old Countrywide loans are now backstopped and marked up to whatever BAC feels is appropriate. And from here its just massive profits in that unit. Citigroup, clearly is "da bomb" up from $1 to $4. Once Treasury forces it to purge the bad loans into the PPIP program - well then it's all gravy train. Yep.
There is also the option of ETFs... I've listed 3 major ETFs below with their top holdings.
I won't go into the individual names but you can see the concentration of holdings for each and which names are in each. Here is how the 3 ETFs have done over the past 1 month period and 3 month... it's pretty consistent performance
1 mo (click to enlarge)
3 mo (click to enlarge)
As we can see, IAT lagged the other two ETFs - I assume this is because it is top heavy in USB and most of the banks in the top 5 did not fall as much as the "worst of" and are considered "better of breed". Hence on the bounce they did have as much of an oversold condition to work off of.
But we live in a sector dominated, program trading (HAL9000) world now - so as the student body runs left and right, even buying either ETF RKH or KBE let you get the same (or better) performance as buying 6 of the 8 individual names I listed above. Because, as we've been saying for nearly a year now - there has been little discerning between one stock and another in a sector. Either it's all bad or all good. In this case, the only way to outperform those two ETFs was to buy best of breed Citigroup (C) or Bank of America (BAC). So you could get the best of both worlds, diversification among a host of banking stocks and the same or better performance than buying most individual stocks.
Now I am not showing you the "real winners" - those banking stocks below $3 or so in early March who are now rocketing up 15% a day, even though there were questions if they were even going to be going concerns. There is no ETF to buy those, but there are now a bevy of stocks made solvent by the magic of the taxpayer.
So of course the open question now is: does one chase into these most excellent of government supported entities. I don't know - the easy answer would be no, but easy is usually wrong. As I've been saying for a week or so now, the irony will be the government supported parts of the state economy should now be outperformers as they have nothing to ever worry about again - and the stocks that unfortunately are still not yet under the shield of the nanny state are still subject to the evils of the free market. So as we adjust to a central command economy, we'll have to adjust investment thinking. If there are any readers who invested in the USSR about 30 years ago please shoot me an email so I learn the in's and out's of how to do this properly.
Banks now can be bought on any pullback as Uncle Sam will make sure you are profitable - with your own money being the cause of course.