Thanks, but No Thanks, for the Bailout

I'm on the hunt for companies that won't end up on the public welfare rolls as part of this massive $700 billion bailout measure. That's why I own shares in PICO Holdings. Just read this straight talk from PICO's CEO John Hart on the company's latest quarterly earnings release: "In an environment where many have learned the downside of excessive leverage in an attempt to maximize short-term earnings, and are now looking to the federal government, sovereign wealth funds, and their own shareholders to bail them out, we continue to manage the company and our assets conservatively."

Love it! Besides the refreshing forthrightness of its management, PICO also sports a robust balance sheet, owns some seriously valuable assets, and has a proven track record of sound investing. Good stuff. But right now, that "no bailout" thing is numero uno on my list.

Here's why
Dilution. As we've already seen with the conservatorship of Fannie Mae (NYSE: FNM  ) and Freddie Mac, and the $85 billion lifeline to AIG (NYSE: AIG  ) , companies that get tangled up in the government's purse strings can certainly survive, but they usually leave next to nothing for shareholders. Combined, these three companies have already destroyed nearly $300 billion in shareholder wealth since the credit troubles began.

And let's not leave Goldman Sachs (NYSE: GS  ) out of this depressing picture. The financial infusion from Warren Buffett may not be a bailout, but the deal -- calling for Goldman to fork over 10% in interest on new preferred shares -- is pretty costly. Moreover, Buffett also gets warrants to buy Goldman stock at a price that will probably be much lower than the market price at the time he exercises. That will mean serious dilution for Goldman shareholders down the road. And besides, would you ever really want to be on the opposite side of a deal with Buffett?

Companies not taking their spot in the corporate-welfare line won't be forced to sell huge stakes to the government at fire-sale prices, issue new shares, or take on costly, prohibitive debt -- all of which can cost shareholders dearly. With PICO, I've got an ultra-clean balance sheet -- free and clear of subprime-mortgage securities -- with lots of cash and hardly any debt.

Reputation. Back to Buffett: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."

You can bet that executives at AIG, Lehman Brothers, and Washington Mutual wish they'd done things "differently." After all, these were revered institutions, built over many decades to become some of the world's largest and most powerful financial institutions. Yet because of excessive risk-taking, too much leverage, and, yes, greed, they were destroyed in less than a year.

A company's reputation, particularly in the financial-services industry, is paramount for getting deals and maintaining trust with partners and customers. Without it, you might as well close up shop.

Taking advantage of the situation. My No. 1 reason for loving companies that aren't in need of a bailout: While AIG and Citigroup (NYSE: C  ) spend valuable time deleveraging their debt-choked balance sheets, companies like PICO are taking advantage of the situation and buying up assets and securities on the cheap. Back to PICO: "We are capitalizing on the slowdown in the real estate market, and particularly on the financial challenges facing developers and builders in select locations in central California, by continuing to build our new business, Union Community Partners."

You read that right: In what can only be described as an atrocious real estate market, PICO has gotten busy. Specially, PICO's been buying up lots in California -- more than 1,200 so far. At the bargain-basement prices PICO is probably getting, just imagine the rewards once the real estate market turns around! But PICO wouldn't be in a position to make that type of move if it were winding down its business and selling off assets to appease creditors.

Thanks, but we'll pass
Here are a few other solid financial companies that are saying "thanks but no, thanks" to any government handouts while taking full advantage of the depressed market conditions:

Charles Schwab (Nasdaq: SCHW  )

  • Dilution: None.
  • Reputation: High-quality franchise; customers love talking to Chuck!
  • Taking advantage: While competitors such as E*Trade teeter, Schwab's diverse portfolio of business posted a 22% increase in profit in its latest quarter. Moreover, while banks and mortgage lenders drastically cut business over the past year, Schwab has grown its conservative book of mortgage and home-equity loans by 76% over the past year.

Markel (NYSE: MKL  )

  • Dilution: None; buying back shares.
  • Reputation: Conservatively run insurance outfit that has delivered compound annual growth in book value of 18% over the past five years.
  • Taking advantage: Chief investment officer is using his company's "dry powder" to buy quality companies for Markel's insurance portfolio on the cheap.

Wells Fargo (NYSE: WFC  )

  • Dilution: None so far, but probably will have some associated with the Wachovia deal.
  • Reputation: Berkshire Hathaway owns 9%. Enough said.
  • Taking advantage: Wells Fargo trumped Citigroup's bid for Wachovia with one of its own -- one that doesn't require government assistance or FDIC insurance. The move will greatly expand the bank's business on the East Coast. Says Wells Fargo Chairman Dick Kovacevich: "Given the financial conditions today, I feel like a kid in a candy store."

The Foolish bottom line
Look, this massive $700 billion government bailout might help, but it certainly won't be the final answer to all of our economic and market ills. And companies that look as if they might get some relief from the bailout probably aren't companies you want to be investing in anyway. Instead, buy companies that aren't looking for a bailout in the first place. These companies have the balance sheets, the reputations, and the opportunistic management teams necessary to take actions now that will pay huge investment rewards down the road.

Our Motley Fool Stock Advisor service has a whole slew of companies that aren't in the business of government handouts. In fact, since inception in 2002, our bailout-shy companies have racked up average returns of 21% compared to negative 10% for the S&P 500. You can take a free trial today and get instant access to all of our best ideas for new money -- just click here to get started.

Matthew Argersinger owns shares of Markel and PICO Holdings. Charles Schwab and Berkshire are Motley Fool Stock Advisor recommendations. Markel and Berkshire are Inside Value selections. The Fool owns shares of Berkshire Hathaway, and its disclosure policy does not need a bailout.


Read/Post Comments (24) | Recommend This Article (47)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2008, at 4:57 PM, mapkas100 wrote:

    Again, its not a $700 billion dollar bailout that taxpayers will be responsible for. It's $850 BILLION. The extra $150 billion in pork is the reason the bailout passed.

  • Report this Comment On October 07, 2008, at 5:57 PM, toyuwanewton wrote:

    Thanks for the info FOOLS!!!!

  • Report this Comment On October 07, 2008, at 7:03 PM, HemiJimmy wrote:

    The bail out bucket has holes in it. Bail faster.

    HemiJimmy

  • Report this Comment On October 07, 2008, at 7:44 PM, simonkathrein wrote:

    What I would like to know is how these exec's are walking away with these multi-million dollar bonuses and salaries they recieved for the last few years... scott free... and it's the taxpayers and shareholders that have to pay for it and suffer????

    I think in the next year or so you are going to be seeing all these big wig executives get the living daylights sued out of them by angry livid shareholders.

    I'll buy popcorn to watch that one!!

  • Report this Comment On October 07, 2008, at 8:00 PM, Titusfin wrote:

    These are great points. I agree with the above comments; those exec's need to be held accountable. But I am with Matthew, lets look at the companies that are strong and worth investing in. This is a great time to take advantage of a down market and prosper when it goes up!

  • Report this Comment On October 08, 2008, at 12:24 AM, amylc wrote:

    Thanks for nothing. I want an AIG spa day too. Here is an idea, how about the government, Fannie and Freddie throw those of us who have been paying our bills, mortgages a bone! I say we all get the option for a government backed loan 30 years at 4%. extra money out of my mortage to go to the spa and a paying loan they can then sell back to a bank.

  • Report this Comment On October 08, 2008, at 2:04 AM, magillg wrote:

    Ya! What amylc wrote, Once again the prudent responsible rule follower who is working hard to make ends meet will end up with nothing and contine to struggle along. I'm tempted to stop paying my mortgage so I can qualify for a bailout loan and a day at the spa.

  • Report this Comment On October 08, 2008, at 7:14 AM, shadelizzard wrote:

    Let's not forget that the blame for the sub-prime mess started with the Federal Government wanting to spread home ownership to people who could not come up with the normal down payment, Banks were initially forced into the program, then everyone got greedy until...

  • Report this Comment On October 08, 2008, at 11:09 AM, arivera4506 wrote:

    Great posts, everyone. This issue is a bipartisan problem that EVERYONE got involved in; either pro or con. Greed was the name of the game for the last seven years.

  • Report this Comment On October 08, 2008, at 12:44 PM, Stiglitzisright wrote:

    Republicans/Fox news would like very much to spread the blame at the risk of propping up their failed deregulatory policies. It is painfully obvious that the unregulated trading of CDOs is the overwhelming error in the world financial system. Trying to pass this on to the Dems after Republicans arrogantly fought tooth and nail to deregulate the capital markets for the past thirty years is the height of cowardice and bad faith. Wall Street whiz kids created sophisticated financial instruments such as collateralized debt obligations and credit-default swaps and gamed the rating agencies to provide those instruments with AAA scores, and highly liquid foreign investors lost their mind over them.

  • Report this Comment On October 08, 2008, at 1:37 PM, Huskybytes wrote:

    WAIT A MINUTE

    It's all on paper, right?

    WAIT until the elections are over before selling anything. I have bad arthritis in my knees and they always tell me when it is going to rain - they have been fine so far....he he he.

    Sure the retirement accounts look bad today but so did all the accounts after 9-11 when the market was shut down. It did recover and in Jul-07 broke 14,000DOW.

  • Report this Comment On October 08, 2008, at 1:41 PM, Huskybytes wrote:

    It can't all be bad. There was an infomercial last night about Buying Realestate in a Down Mkt! (sure, it was directly followed by a colon cleanse product)

  • Report this Comment On October 08, 2008, at 1:47 PM, rominosj wrote:

    The market will keep going down, and the rationale is simple. Banks have no cash, Banks get money from corporations, corporations have no cash, banks have no cash, investors have no cash from their savings, and get their last pennies from the stock market before every penny is smoked. So, banks with no cash and so much debt simply go bankrupt, and people get desperate because their savings are gone, and of course they want to get out of the stock market before their neighbor does.

    This is not the end. The worst should come by Jan or Feb 2009, and markets will be this volatile at least until second half 2009, so I recommend everyone to be prepared.

    Will it crash 90% like the 30s? No, if the fed keeps helping the rich, but I think it could be at 50% off its high of 14,000 before end of year.

  • Report this Comment On October 08, 2008, at 1:52 PM, sharktrade wrote:

    as a fool my only trust to... SPECBEAR !

  • Report this Comment On October 09, 2008, at 2:42 AM, jerseydahlia wrote:

    The government should not be bailing out the people who made a "mistake" in buying their homes. Yes, some may have been lied to by their mortgage companies......but, my guess is that more often than not, these people were more than anxious to purchase their homes before prices went even higher.

    Let's face it. if you had two couples who were offered a nortgage that could go from $1,000 per month to $2,000 per month, half of the people would take it and say "well, we are only putting $5,000 down, so what is our downside. Prices are going up right now, so it should be O.K. If we can't make our morthage payment, we just walk away from the deal and we really haven't lost much. The other half say, we probably should not take that chance.

    With the bailout, we are rewarding the first couple and punishing the second, more prudent, couple.

    We are perpetuating the tendency to buy more than we can afford. How does this help us as a nation?

    This is why our stock market keeps plummetting. O.k., maybe I didn't spell that correctly, ....but I think that you get my drift. It is not until people feel that they are being treated fairly, that they will feel safe in investing in our economy. No one wants to pay for someone else's folly., Why should we?????

  • Report this Comment On October 09, 2008, at 1:52 PM, DWolfson wrote:

    Today's Doonsbury cartoon says it very succinctly: "...expose them for their part in rigging a game that privatizes profit but socializes risk!"

    If I'm paying for this risk now, I expect to OWN those companies that I bail out - my first order of ownership- top managers are all fired and must return their bonuses.

  • Report this Comment On October 10, 2008, at 3:45 PM, LibertyVini wrote:

    Uh, excuse me, PIMCO ALREADY got bailed out - when the Feds took over Fan and Fred they cashed in to the tune of $1.7 BILLION!

    http://thedailyobfuscation.blogspot.com/2008/09/bail-out-han...

    The author's basic premise invalidates the entire rest of the article. What a load of self-righteous bull!

  • Report this Comment On October 10, 2008, at 11:00 PM, Cerebus wrote:

    Uh, excuse me LibertyVini, but maybe you should read the article and try to understand it before going off on the author. The author is talking about Pico Holdings (Nasdaq: PICO) not PIMCO, which is a subsidiary of Allianz SE, a German based global financial services company.

  • Report this Comment On October 11, 2008, at 6:55 AM, mchuckie wrote:

    As someone recently said, there is only one end of the world, and this ain't it.

  • Report this Comment On October 11, 2008, at 11:18 AM, PapaGold wrote:

    When the bail out was being mulled over in the beginning, the Motley Fool was all for it and even asked to help send support to congressmen in favor of it... While the rest of us, even everyone in the Motley Fools forums were outraged and would have no part of the Bail-out. I guess hind site is always 20/20.

  • Report this Comment On October 11, 2008, at 1:56 PM, opportune wrote:

    FOLKS

    LETS LOOK AT WHAT THE BANK BAIL OUT REALLY MEANS:

    Well...the media is all singing off the same song-sheet.....(how do you spell "sheep" ?)......

    Banks goofed....sold paper to people who didn't know what they were buying....pay-the-piper-tiem....cards fall in.....bail-out required. That's the same "story" that has been perpetuated by every media outlet across the land. But why the Big Push to "explain" to us peons....ummmm.......

    Well a couple of signals:

    A) they seem to be trying hard to shove this thing down the public's (world) throat...."hurry"..."catastrophe"..."sky is falling"...loose jobs...loose homes...

    B) the pure math....Bear Stearns, AIG, Fannie Mae, Freddie Mac, Lehman Bros, Merril Lynch.....they are all LARGE losses....but no where NEAR $700 Billion.

    'C) what we are fed is: banks made silly choices, smoke and mirrors, cards now fell....we need to bail them out. Simple issue: banks failing / economic fundamentals in shambles. No choice. Bail-out. How much? $700 billion.

    D) start to use the word "billion" and "trillion" and you succesfully loose everybody. Nice tactic with gallons and litres....you still hear the phrase: "gas is $1.40 a gallon". If you ever said...you know it's $6 a gallon, they would faint.

    Sooo.....let's look a but further and peek behind the curtain. Let's get the actual BILL that Congress was fretting about on both sides....and how bi-partisan the whole process was......

    Well...lookie here...what the so-called "bail-out"...ALSO INCLUDES !!!!!

    Sec. 101: Extension of alternative minimum tax relief for nonrefundable personal credits.

    Sec. 102: Extension of increased alternative minimum tax exemption amount.

    Sec. 201: Deduction for state and local sales taxes.

    Sec. 202: Deduction of qualified tuition and related expenses.

    Sec. 203: Deduction for certain expenses of elementary and secondary school teachers.

    Sec. 204: Additional standard deduction for real property taxes for nonitemizers.

    Sec. 205: Tax-free distributions from individual retirement plans for charitable purposes.

    Sec. 304: Extension of look-thru rule for related controlled foreign corporations.

    Sec. 305: Extension of 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements; 15-year straight-line cost recovery for certain improvements to retail space.

    Sec. 307: Basis adjustment to stock of S corporations making charitable con tributions of property.

    Sec. 308: Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands.

    Sec. 309: Extension of economic development credit for American Samoa.

    Sec. 310: Extension of mine rescue team training credit.

    Sec. 311: Extension of election to expense advanced mine safety equipment.

    Sec. 312: Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.

    Sec. 314: Indian employment credit.

    Sec. 315: Accelerated depreciation for business property on Indian reservations.

    Sec. 316: Railroad track maintenance.

    Sec. 317: Seven-year cost recovery period for motorsports racing track facility.

    Sec. 318: Expensing of environmental remediation costs.

    Sec. 319: Extension of work opportunity tax credit for Hurricane Katrina employees.

    Sec. 320: Extension of increased rehabilitation credit for structures in the Gulf Opportunity Zone.

    Sec. 3 21: Enhanced deduction for qualified computer contributions.

    Sec. 322: Tax incentives for investment in the District of Columbia.

    Sec. 323: Enhanced charitable deductions for contributions of food inventory.

    Sec. 324: Extension of enhanced charitable deduction for contributions of book inventory.

    Sec. 325: Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds.

    Sec. 401: Permanent authority for undercover operations [as related to tax provisions].

    Sec. 402: Permanent authority for disclosure of information relating to terrorist activities [as related to tax provisions].

    Sec. 501: $8,500 income threshold used to calculate refundable portion of child tax credit.

    Sec. 502: Provisions related to film and television productions.

    Sec. 503: Exemption from excise tax for certain wooden arrows designed for use by children.

    Sec. 504: Income averaging for amounts received in connection with the Exxon Valdez litigation.

    Sec. 505: Certain farming business machinery and equipment treated as five-year property.

    Sec. 506: Modification of penalty on understatement of taxpayer’s liability by tax return preparer.

    Sec. 601: Secure rural schools and community self-determination program.

    Sec. 602: Transfer to abandoned mine reclamation fund.

    Sec. 702: Temporary tax relief for areas damaged by 2008 Midwestern severe storms, tornados and flooding.

    Sec. 704: Temporary tax-exempt bond financing and low-income housing tax relief for areas.

    Sec. 709: Waiver of certain mortgage revenue bond requirements following federally declared disasters.

    Sec. 710: Special depreciation allowance for qualified disaster property.

    Sec. 711: Increased expensing for qualified disaster assistance property.

    Seriously, did they think no one was going to read this thing? “Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands”? “Seven-year cost recovery period for motorsports racing track facility”? “Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds”?

    What pray tell is Sct #322 tax incentives if you invest in D.c. ????

    Hope you enjoyed the ride. :)::)::)::)

  • Report this Comment On October 11, 2008, at 8:33 PM, Luke001 wrote:

    OPPORTUNE-Most of them never read the bills before they vote for them, so I guess they think we won`t read them either.

  • Report this Comment On October 13, 2008, at 9:36 AM, circa1850 wrote:

    More muck and mire to wade through. Ridiculous. I agree with opportune and Luke001 and many others above about ill-gotten bonuses paying the bail-out first through fines and returns of the bonuses.

    Also, would an intelligent government really allow a system with these "tag lines" in a bill passage? I feel legislators should be able to pass bills by eliminating all "add-ons".

  • Report this Comment On October 13, 2008, at 8:57 PM, PapaSmurf47 wrote:

    If our government really wanted to stimulate the U.S. economy it would have

    been cheaper to write a 1 million dollar check to every legal citizen. Better to give everyone a million than a select few 850 billion.

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