In late November, our government drew the line in the sand in the banking and financial sector. With that line, there will be clear winners and losers.
That does not mean it won’t be a bumpy ride along the way.
Thus far, the government has done little to show that they are willing to strike a hard bargain in return for capital. Instead, the government would much prefer to provide a lifeline in return for certainty that the markets will not collapse entirely.
Who needs a government if the entire system fails? I guess then it is no surprise that the terms for access to TARP do not go so far as to entirely nationalize the banking sector.
What does that mean for you? Well, if you have a strong stomach, there is money to be made riding the coattails of pseudo-nationalization.
Equity will survive as the program is now being run. Of course, that may change at any moment.
Now, here we are in mid-January, 2009 and the big banks are returning to big brother with hat in hand.
Bank of America (BAC) apparently misjudged the bad assets on the books of Merrill Lynch and needs help. The government grants BAC another $20 billion in assistance on fears that collapsing the deal would result in panic selling in the market.
The terms of the deal are similar to what Citigroup (C) agreed to in late November. BAC issues some preferred stock and warrants to receive the capital.
These are all great things that in the long run will be very beneficial to BAC equity holders. CEO Ken Lewis states, “this company will generate huge amounts of profits.” Indeed, when the economy recovers, so too will BAC.
The same goes for Citigroup. This week, some suspect at government urging, divested its brokerage unit followed by a major change in its business model. Citigroup will now operate as two separate businesses ditching the supermarket model that the company followed previously.
The idea is to push bad assets into one unit while allowing the good assets to operate unencumbered.
Both C and BAC are trading substantially lower on the news. Understandably investors are skeptical, but I’m skeptical of the government completely nationalizing the banks. As such equity value should be preserved.
I’d double down here.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com. James F. Dlugosch contributed to this article.
