BG13052009
BANK WITH UNCLE SAM?
The US Government is becoming the banker of bankers – is this a good thing?
By Neil George
Uncle Sam has a deal for you. Open a new checking account with his bank with direct deposit and get a new toaster. Add to that a few CD’s and you might be the next winner of a free trip to Hawaii.
And don’t forget to ask about Uncle Sam’s deals on home equity and auto loans – easy terms with no up front fees.
Is this what’s coming our way over the next several months when it comes to the banks of the nation?
The current administration continues to move further and further into the business of banking. Already we have Uncle Sam owning hundreds of billions of dollars worth of preferred stock in banks around the nation. And with warrants giving them long term calls on common stocks of these same banks – the distinction between public and private ownership is quickly slipping away.
Yesterday it was leaked that the West Wing was working to use its shareholder rights to try to flex its muscles with bank management. The current president is rumored to want to limit pay packages including incentive pay for banks – regardless of whether they’re in jeopardy or even in receipt of TARP cash and capital.
Scary right?
And with the recent slap-down of bond holders and stock holders in Chrysler and soon over at General Motors – the market indeed needs to take some of these threats very seriously.
Right now, banks have a series of programs that have been pushing government capital their way.
We started with the US Federal Reserve Bank which has ballooned its assets via several easings of rules over what kind of assets can be posted for loans and reserves. Then we’ve added to that the direct lending via securitized and whole loan assets from banks.
Then we continue with the TALF – or Term Asset-Backed Security Loan Facility. This is another wave of hundreds of billions in which actually works to bundle consumer loans into securities in which then are effectively purchased by the US government.
And we’ve just begun to fire up another great acronym – the PPIC – Public Private Investment Corporation. This is where bad assets of banks are sold to the public with loans funded by the US government and credit guarantees if the loan assets actually end up losing money.
Oh, and one more thing – the FDIC is providing insurance for bank bonds issued – all on top of the expanded insurance for deposit liabilities of the banks.
Summing it up – Uncle Sam has preferred stock and calls on common. It has ownership and loans of trillions of dollars of bank assets and it’s moving to dictate who manages the banks and compensation of the management.
Is this a good thing?
I for one – would have preferred the way that we dealt with the last major credit and bank fiasco in the ‘80s whereby the government just seized the banks and sold them off and was done with it – and in the process kept the private sector running and owning the banks.
All this said – it seems that Uncle Sam wants the banks to continue to hum along – if only to a new band leader.
And for those that do cite the fact that some more than 30 banks have been seized and sold over the past several months – the distinction continues to be that if the bank is a small community bank with assets in the sub-500 million – then they’re politically expendable. Otherwise – no seizure and instead, Uncle Sam takes a piece and keeps everything up and running.
This means that if we look at the banks that have Uncle Sam Capital – we can see some potential gains by investing along both in bonds and preferred stock. The downside risk is that the current administration could of course change the rules on existing financial contracts and loan and bond covenants.
Yet the downside protection against this would be that if that were the case – the credit and market conditions of the fourth quarter of last year would look like good times compared to how Wall Street would react.
A couple of preferreds that I’m eyeballing including FirstBanks – out of Saint Louis. No common stock – just preferred out there – look at the 8.15 percent preferred currently yielding around 10 percent. It trades on the NYSE under the symbol FBS A.
Then there’s preferred from Regions Financial. I’ve covered the government’s stress test of this bank as well as my own. It has an 8.875 percent preferred trading under the symbol RF Z on the NYSE that’s yielding over 11 percent.
On the bond front – there are plenty of my favorite easy to buy and own minibonds issued by several credible banks. Two in particular worth peeking at would included the Bank of America 5.875 percent bond trading on the NYSE under the symbol IKM yielding near 9 percent and the Goldman Sachs 5.8 percent minibond (NYSE: JZS) again trading at a discount to yield near 9 percent.
Finally, a man that was Uncle Sam’s banker of bankers – died at 88 years. Bill Seidman was a very bright guy from a family with a prominent business in the financial markets. And he could have made further fortunes many times over – but rather he sought to serve.
Bill’s government service came at the local and state level and quickly moved to the Federal level. Joining President Gerald Ford – Bill was the President’s economic advisor during a very turbulent time.
After a hiatus during an interim administration – Bill returned to National service in 1985 when he was appointed by President Ronald Reagan to head up the Federal Deposit Insurance Corporation (FDIC). Bill’s new appointment came at a crucial time as the thrift crisis was just getting ready to really fire up. In fact, it was Bill that was one of the principal architects of the Resolution Trust Corporation (RTC) which unlike today’s bank crisis – was very direct at getting to the root of the issue.
Under the leadership of Bill – the RTC and the FDIC (after the de facto absorption of the FSLIC – Federal Savings and Loan Insurance Corporation) seized and shut down 747 or so thrifts amounting to nearly 400 billion in assets. Then they sold off the assets and had the whole thing wrapped up in not that many years.
Neil George is editor By George and Stocks That Pay You.
The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.
Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.
