I am not a fan of the recent bailout bill. Originally in favor of bold action by the Treasury Department, I soured on the deal as time went by. I’m sorry, but with Goldman Sachs (GS) in line to lose what is estimated to be some $20 billion due to the crisis, I am highly skeptical of Paulson’s motives here.
There is nothing like a little help from your friends, especially friends in high places.
At the end of the day, I think Wall Street collapsing may have been the best thing that happened to this country. Instead, we get a system of a few in power deciding the winners and losers, and they are doing it with taxpayer dollars.
Using taxpayer dollars in this way is fundamentally wrong. If the decision is made to take bold, socialistic type steps such as this, I would much rather see the government nationalize banking and investment banking.
In doing so, we the taxpayer take ownership of the banking system as we flush the system of the excess from Wall Street. With estimates of potential losses in mortgage securities estimated in the trillions, the $700 billion bailout may be just a finger in the dike.
I’m of the opinion that bold action was needed. Instead we have a solution that seems to only go part of the way. Even worse, the government instead of the market gets to decide who wins and who loses in this new world.
Some of those decisions have already been made. At the top of the list of government chosen winners is Bank of America (BAC). During the weekend when Lehman pleaded for assistance from Washington, the government was encouraging BAC to buy Merrill Lynch. (See also: "How to Turn Bad News Into Profits.")
The arranged marriage was described as a deal of a lifetime by BAC CEO Ken Lewis. He was right. Acquiring the greatest brand on Wall Street on the cheap with the government’s assistance was a deal too good to be true.
Forget about the short term troubles. Once the dead wood is taken out of the economy, BAC is in prime position to dominate the financial services industry. (See also: "Fire Sale for Financial on Wall Street.")
Or is it?
On Monday, BAC announced that third quarter results were worse than expected. In addition, the company stated that it would be cutting its dividend in half and raising $10 billion in capital.
The company made a profit of a mere $0.15 per share as compared to an expected profit $0.62 per share. The results represent a 68% drop from the same period last year.
It is a smart move to raise capital, but current shareholders are diluted as a result. In addition to absorbing Merrill, BAC is also dealing with its acquisition of mortgage poster child Countrywide.
Investors did not like the news as BAC traded down 10% in the after hours market. This on top of the loss of nearly 7% earlier in the day. Even so, shares of BAC are doing much better than the rest of the market since that fateful weekend.
That’s the way it goes when you are a chosen one. Given its status as a survivor in this mess, owning BAC on these short term moves makes sense to me. Although we may need to endure a protracted recession, BAC is positioned for the long term.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
