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Betting on Bailouts (and Foolanthropy)

Recs

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November 29, 2010 – Comments (15)

With all the news about European sovereign debt and banking problems, I thought a look back at some share price histories from the recent US version of the big bank* bailout bonanza might be useful.  Obviously, pre-bailout investors in the old GM, Fannie and Freddie got hammered, but some of the pre-bailout bets on the TARPed banks turned out well.
   *"bank" is loosely defined to include automakers and mortgage bundlers.

What was interesting was all eight of the first banks to take TARP offered investors much better entry points about a month after the bailout kicked off and, of course, even better entry points at the market lows of March '09.

Rather than a teaser, I'll repost the conclusion.

I don't know how the European bailouts, banks, and backstops will play out. I'm sure some investors will find great bargains in the wreckage and some will lose lots of euros. I do know that in the recent U.S. version of this play, there was no need to rush in. Investors who waited on the details and then waited for bad news or panic to depress share prices did much better than those who bought on bailout and backstop speculation.

The rest of the article is here.

There have been a couple of major developments since I submitted the piece. 

First, the EU has come up with a loan pool for Ireland.  There is money available for the banks, but I haven't seen details on what concessions, i.e. warrants, preferred stock, common dilution, etc., will be involved.  I don't think nationalization is off the table yet.

The Wall St. Journal reported that the European Financial Stability Facility, the bailout fund, will need to issue bonds to raise the capital that gets loaned to any nations using the facility.  The Heard on the Street column makes it sound like raising the funds at attractive rates may not be a sure thing.

A portion of the Irish package is funded from the Irish pension fund.  That's been a source of some protests as Irish citizens aren't thrilled at seeing their pension fund tapped while bond holders in the banks are made whole.  Can't say I blame them.  Irish bond package summary.

Best of luck to anyone speculating in any of the troubled European markets.  I think I'll pass on that casino.

Finally, this year's Foolanthropy drive is on! 
To help kick it off, I'm matching up to $50 of the Fool's dimes for comments posted either here or at my article.

Foolanthropy on!

Russ

15 Comments – Post Your Own

#1) On November 29, 2010 at 10:37 PM, TMFJake (32.86) wrote:

Finally, this year's Foolanthropy drive is on! 
To help kick it off, I'm matching up to $50 of the Fool's dimes for comments posted either here or at my article.

Right on Russ!

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#2) On November 29, 2010 at 10:55 PM, blesto (31.02) wrote:

+1 rec for rd80's post

and 10+10 cents for TMFJake

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#3) On November 29, 2010 at 10:58 PM, blesto (31.02) wrote:

Oh, that was Russ's article.

10+10 more

I'm starting to type faster for Foolanthropy than reading.

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#4) On November 29, 2010 at 11:29 PM, Option1307 (30.06) wrote:

Nice article, +1.

I won't be touching AIB/IRE  b/c they are too risky for my taste at the moment, but I definitely think ther are other ways to play this as well. 

I have scooped up shares of STD recently as I think they can profit from the European stability, the are a well capitalized bank, and pay a solid dividend. I'm sure there are numerous other plays out there but STD fits what I'm currently looking for.

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#5) On November 29, 2010 at 11:47 PM, rd80 (97.59) wrote:

STD has popped up in enough discussions that I need to do some homework on it.

 

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#6) On November 30, 2010 at 5:13 AM, fmahnke (86.07) wrote:

god job

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#7) On November 30, 2010 at 9:20 AM, lemoneater (69.98) wrote:

@ #2 I think that Russ, rd80, and TarpedBanks are all the same person.

I've mostly left banks alone after my brief fling with WAMUQ.PK which has been my lowest scorer ever. BAC also burnt me.

I have shares in Schwab which seems a sensible way to make money off my trading costs. 

Have a great day! 

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#8) On November 30, 2010 at 10:31 AM, rd80 (97.59) wrote:

@ #7 - Yep. Russ, rd80 and TarpedBanks are all me.

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#9) On November 30, 2010 at 12:37 PM, lemoneater (69.98) wrote:

:) somehow tarps bring to mind vehicles that are not loved enough to have a spot in the garage. Tarps should be temporary measures only, but I have seen cars, etc. rusting slowly under tarps.

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#10) On December 01, 2010 at 11:06 AM, ikkyu2 (99.22) wrote:

My prediction that TARP would crush unTARPed banks sure didn't come true, did it?

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#11) On December 01, 2010 at 7:09 PM, rd80 (97.59) wrote:

Actually, I think both our predictions were pretty accurate.  Investing in banks that took TARP back in Oct '08 was generally a good way to lose money.  Ditto for banks that didn't take TARP.

One area the TARPed banks did do better was failures.  I haven't checked recently, but TARPed banks were failing at a much lower rate than overall bank failure rate.  That makes sense since there was supposed to be a screen for getting in to TARP and the capital would have helped stay solvent.

Thanks for the comment and for helping kick another couple of dimes towards Foolanthropy.

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#12) On December 02, 2010 at 1:04 PM, puccini3005 (29.74) wrote:

A dime and a rec from me!

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#14) On December 06, 2010 at 11:22 PM, Option1307 (30.06) wrote:

Woo charity, +0.10!

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#15) On December 07, 2010 at 12:17 AM, TMFBabo (100.00) wrote:

You're TarpedBanks? Very nice.

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