Back-door nationalization: A no-win situation for investors
Today's Financial News - Posted April 20, 2009
The Treasury Department is tired of dealing with Capitol Hill. Instead of getting permission to spend more money, it will change the rules in the middle of the game. It is going to cost us all a lot of money.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): The markets have a serious case of the “Mondays” today. If you are like me, you wake up on the first day of the trading week and instantly wonder what the government has planned for the week.
Today’s action is far from appealing. Whether we call it government “activism,” political pandering or plain old ignorance, Wall Street does not like Washington’s latest press release. With TARP funds dwindling (only $135 billion left) and the need for more action apparent, our devoted market interveners are working on transforming their “bailout” loans into equity investments.
If the nation’s business executives were not afraid of the government yet, they are now. This is the ultimate in changing the rules in the middle of the game.
We agreed to what?
So far, nine small banks have repaid their TARP loans, with the requisite interest payments. But those were tiny, no-name institutions (in the grand scheme) that relatively few investors and analysts monitor. Now that Goldman Sachs (NYSE:GS) and J.P. Morgan (NYSE:JPM) want to get the government and its overzealous manipulations off their back, the Obama administration is forced to throw a few curve balls.
This week’s pitch is buying equity stakes in the nation’s banks. Some folks call it back-door nationalization. I think it is more like knocking down the front door with a sledge hammer and sending in the SWOT team. There is nothing covert about this move.
Obama wants control. And he will do whatever it takes to get it.
Unfortunately, the markets will fight back any way they can. Today, the weapon of choice is valuations.
With Washington passing up hefty dividend payments in order to elbow its way into unpredictable equity stakes and the controlling power that the investment comes with, investors are slashing their bids, especially in the banking sector. Even after beating expectations, Bank of America (NYSE:BAC) is down by double-digit proportions.
At least Uncle Sam will get his shares at a discount.
In just a few weeks, we will get the “stress tests” results. While I am not holding my breath in anticipation of any material news, the political maneuvering in the last few weeks signals the situation is not all that grand. Why else would Obama be forcing even the healthiest (relative term) of banks to keep their cash?
Put on a hard hat
As investors, today’s action is a clear signal the markets are shouting, “Watch out below.”
The few economically educated proponents of this measure call the move a mere change in accounting. After all, the government is changing preferred shares into ordinary shares. Guys like Warren Buffett do it all the time.
They could not be more wrong.
When Washington got its hands on billions of dollars worth of preferred stock, it did not have to push countless common shareholders out of the way. It merely injected the money, was promised a hefty dividend and could be easily repaid with few financial ramifications.
By creating huge amounts of common shares, the little guys like you and me, own that much less of the nation’s banks. When the government finally decides to unload its position (doubtful in this political environment), those shares will not simply vanish. Somebody will have to buy them. If the laws of supply and demand are still around (even that could be doubtful), valuations will drop as supply increases.
This is a no-win situation for American investors. It marks a good time to buy a handful of protective puts. Smart investors are preparing to see the S&P drop to the 800 level once again.
We have a slew of important dates in the not-so-distant future. So far, investors are not looking forward to any of them.
As long as the government continues to intervene everywhere it can, investors must be cautious. If you have never used options as portfolio insurance, now is the time to do it. You can learn more here.
Next Article: Caterpillar unearths an options-trading opportunity
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