U.S. “Guarantees” These 9 Banks Will Not Only Survive, But Prosper
The credit crisis has hit the U.S. banking industry like a tsunami. Unending waves of write-downs and defaults keep slamming financial institutions.
The government’s response: investing hundreds of billions in the banking sector. It’s provoked outpourings of anger and criticism from just about anyone you talk to.
But it looks like it’s working.
Our nation’s collective “investment” in these institutions hasn’t just shored up the unstable banking landscape, it’s given us some clear investment landmarks that will be around for years to come. Here’s how the survivors have been given a distinct advantage – and what the government is recommending you should buy.
U.S. Treasury Performs Bank Triage
When Bear Stearns declared bankruptcy, the financial map changed considerably. Companies once considered “too big to fail” now looked squarely in the crosshairs of insolvency. Regulators quickly opened a “triage” unit to treat the crisis victims. And like any emergency room overloaded with wounded, they couldn’t save everyone.
To be sure, the Treasury Department was going to pick and choose who would receive help based off of merit and marketplace control. And they helped negotiate the buyouts by stronger players of the “bleeding” companies they couldn’t treat.
As a measure of last resort, the U.S. government started to insure certain portions of debt from failing companies being acquired. Their hope was that it would protect the purchasers, and provide motivation to follow through with these rescues.
The greatest concern was that few knew the true extent of the liabilities within these failing firms.
In the midst of the crisis, broker-dealers and investment banks looked at their options and realized that in order to survive this crisis, they would need to add capital or deposits to maintain a positive bottom line. Many chose to merge with traditional trusts, becoming bank holding companies literally overnight.
Now, investment banks made this change as a last resort. Bank holding companies are governed by much stricter rules and regulations than an investment bank is – especially regarding the amount of leverage they can assume and how aggressive they can be with asset valuations.
But while this holding company format comes with additional restrictions, these “new banks” also have greater access to government capital and short-term borrowing.
On October 1, Congress authorized the U.S. Treasury Secretary Henry Paulson to lend up to $700 billion to get our banks back in the black. The program is called the Troubled Asset Relief Program, or TARP, and gave Paulson immediate access to $250 billion. Within weeks, at least 20 of the nation’s largest banks had accepted funds designed to bolster their finances, expand their loan offerings and shore up their shaky financing.
But unlike the excessive interest rate (LIBOR + 8.5%) and loan repayment requirements imposed upon AIG with its $122.8 billion government injection, the banks were given a sweet deal.
Through TARP, banks are able to borrow government funds at only 5% for five years – then jumping to 9% – with the Treasury getting some preferred stock and warrants for its troubles.
And when you compare that to the 10% to 15% required rates of return it would cost for public companies to raise capital on the open market today, those minor government requirements look pretty appealing.
A Buy Signal for Investors
The last time the United States stepped in to rescue private corporations at this scale, it was due to the savings and loan crisis of the 1980s and 1990s. The U.S. Government invested over $324.6 billion to stabilize the thrifts and trusts. But at the end of the day, it was a moneymaker for the taxpayers.
That’s one of the most important things to keep in mind here.
It’s one of the clearest signals that the buyouts and capital injections have given us. And it’s yet to be understood by the market. Henry Paulson and Federal Reserve Chairman Ben Bernanke couldn’t have been more explicit about this message, either.
In their two-step process of stewarding bank buyouts and injecting billions of fresh capital into a handful of the largest, fittest financial companies, the federal government has told us exactly where to invest.
They have shown us who the strongest players are, and which firms will not be allowed to fail. Just look at Citigroup. It received an additional $20 billion and loan guarantees after its initial $25 billion. The banks receiving bailout funds simply will not be allowed to fail. You’ll be hard pressed to get a better “rubber-stamped” signal for which banks are safe to invest in.
And the timing couldn’t be better.
The last bit of market jitters have sent the banking sector down well below the lows hit in July. This could be the last time we see bargains like this in the banking sector for the next decade. Here are a few of the players best positioned for long-term profit.
Three Banking Titans Emerge
One of the strongest companies to emerge from this credit meltdown is Bank of America Corporation (NYSE: BAC). Already one of the country’s largest banks, BAC picked up Countrywide Mortgage’s $130 billion loan portfolio for $3.5 billion in July. It then followed that acquisition with a government approved buyout of Merrill Lynch in September. That transaction added 17,000 brokers and nearly $1.5 trillion under management for a mere $50 billion.
From these deals, Bank of America got one of the largest IPO underwriting departments, one of the biggest U.S. mortgage companies, a highly profitable global wealth management division, and a majority of the country’s leading investment bankers. These combined assets will place BAC as a major financial player for decades.
At around $20, Bank of America’s stock is well below its 52-week high of $48.58. And even after slashing their dividend to increase cash liquidity, it’s still giving investors almost a 6% yield. With $719.8 billion the largest amount of total U.S. deposits, Bank of America is the dominant national player in the banking and financial services sector.
But they’ll face some steep competition from the country’s second-biggest bank, heavyweight Wells Fargo & Company (NYSE: WFC).
Wells is in the process of picking up a majority of now defunct Wachovia’s assets. The combined company will have the most bank branches in the United States with 6,779. This brings their total U.S. deposits to $711.5 billion.
As a bonus to the $15 billion buyout, Wells Fargo will be able to use Wachovia’s prior losses as a tax deduction to offset income. Shareholders will be able to benefit from reduced tax expenses for years to come.
Another financial titan, JP Morgan Chase & Co (NYSE: JPM) was able to step in and buy another famed Wall Street institution for virtually pennies on the dollar. In March, the Treasury approved its buyout of Bear Stearns and guaranteed up to $30 billion of their less-than-liquid assets.
JPM’s next acquisition was picking up mortgage giant Washington Mutual for only $1.9 billion. It received virtually all of WaMu’s assets, including a $250 billion mortgage loan portfolio, which has helped JP Morgan increase its total U.S. deposits to $649.3 billion.
All three of these banks have brand new $25 billion credit lines from the U.S. government, and should be expected to use them heavily. But these aren’t the only three banks looking to benefit, and they aren’t the only ones getting fresh funding.
The list of regional banks receiving federal cash includes quite a few opportunities:
|
Company
|
Ticker
|
Government Investment
|
| Citigroup |
C
|
$25 billion
|
| PNC Financial Services Group |
PNC
|
$7.7 billion
|
| Capital One Financial Corp |
COF
|
$3.55 billion
|
| Regions Financial Corp |
RF
|
$3.5 billion
|
| Suntrust Banks Inc |
STI
|
$3.5 billion
|
| Fifth Third Bankcorp |
FITB
|
$3.4 billion
|
| Keycorp |
KEY
|
$2.5 billion
|
These seven companies are putting a combined $49.15 billion of taxpayers’ investments to work, making new investments and buying up their competition. If our nation’s history of government bailouts holds true, these capital investments should be profitable ones. And they can be for you, too, if you pick up a few shares of these rubber-stamped banks.
Editor’s Note: While every other investment strategy is being put to the test – and is failing miserably in these markets – stocks in the White Cap index continue to outperform. To find out how you can cash in on these transactions, take a look at our latest research report.
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