Betting on Bailouts (and Foolanthropy)
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
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