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The Best Investor Around: the U.S. Government?

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Should we all wish that we could invest as well as Uncle Sam?

Last year, the U.S. Treasury Department took the fight against financial meltdown to a fever pitch by using a war chest of $700 billion of government money to rain down cash on a seemingly endless number of U.S. financial institutions. At the time it was highly controversial. Now it's beginning to look like it could be quite profitable.

As signs of life creep back into the financial system, the government is reaping the rewards of recovering companies and recovering stocks. According to The New York Times, as paybacks start to pour in, the government has locked in profits of $1.4 billion on Goldman Sachs (NYSE: GS  ) , $1.3 billion on Morgan Stanley, $414 million on American Express (NYSE: AXP  ) , and handsome sums on a handful of others, including State Street and BB&T.

And while Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) still have miles to go before they sleep, there could be significant profits there as well. The Economist recently reported that the Treasury is sitting on as much as $11 billion in paper profits on Citigroup.

Prepare for circular logic
But before we go ahead and anoint Hank Paulson and Tim Geithner the next great hedge fund managers, there are a few things we need to clear up here.

First of all, there are still some pretty massive question marks in the government's investment roster. Fannie Mae (NYSE: FNM  ) , Freddie Mac, and AIG (NYSE: AIG  ) may have been seeing some crazy action from investor lately, but I have significant doubts that they'll be delivering huge profits for taxpayers.

And let's not forget that the government also poured money into carmakers General Motors and Chrysler, both of which have succumbed to Chapter 11 bankruptcy. Though I'm not writing off these once-greats completely, they're busy trying to figure out which way is up while competitors like Ford (NYSE: F  ) and Toyota are eating their lunch.

But the biggest fly in the ointment when trying to crown the Treasury as all-glorious investment guru is the fact that the returns in the securities that the Treasury invested in were completely dependent on the investment. With a big fat plate of government cheese, these firms were able to feed themselves during the lean times of financial meltdown and prove bankruptcy fears wrong. Take away that handout from Uncle Sam's fromage collection and it's likely that many of these firms would have starved to death.

To tout the government as genius investor would be like exalting a poker player as the best in the world after giving him all the aces in the deck.

The take-home lesson
But there is something we can learn from this, and it's something that looks to be increasingly important as the government digs elbow deep into the financial industry (not to mention other industries).

And the lesson is this: Don't fight the government. OK, let me amend that: Don't fight the government in your investment portfolio. As I noted above, there may be a few stragglers among the government's investments, but there have been many more that have scorched short-sellers.

In the past, I've been critical of Bank of America for reasons such as its current management and the team that it's been putting in place. I put Citigroup more than a few rungs below Bank of America. But the bottom line is that I wouldn't bet that the rotting balance sheets of either bank will take them to the afterlife. When you have a sovereign government with virtually bottomless pockets dead set on making sure these firms succeed you're not taking on Goliath, you're messing with Zeus.

So if you think the government is overstepping its bounds, go ahead and write your senator or throw a few invectives about Uncle Sam up on your blog. But do your portfolio a favor and don't step in front of the government's cash-spewing steamroller.

Further Foolishness:

American Express is a Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Matt Koppenheffer (still) owns shares of Bank of America and American Express, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy really likes Uncle Sam's goat cheese. It's a wonderful California goat cheese that pairs well with a Vouvray.

Read/Post Comments (5) | Recommend This Article (23)

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 August 31, 2009, at 5:46 PM, ohoric wrote:

    Damned if they do. Damned if they don't.

    Well, you should be happy you found the culprit. You can blame the government if the economy collapses and you can still blame them if it don't. Good thing some people have the balls to act unlike others who keep whining because their apocalyptic predictions are just not happening, no matter how hard they want it.

  • Report this Comment On September 01, 2009, at 9:36 AM, whereaminow wrote:

    Let's get this straight. When the government creates money out of thin air, uses it to prop up failing fractional reserve banks (a banking system that has failed over and over and over and over and over and over and over and over and over and over again since ancient times), then reaps "profits" from the creation of money, we should celebrate.

    Well, I would like to celebrate. I'm not going to pay my taxes. The government has made enough money this year, so they should be good right? No need for me to help them out right? They are, after all, a great investor. Well, then that's great! What do they need me for?

    Again, someone with a brain larger than a pea (a Republican) or a peanut (a Democrat), please explain this to me.


  • Report this Comment On September 01, 2009, at 10:04 AM, Aphexwolf wrote:

    Alright, so we've got 11 billion down, we just have 11 trillion more of debt to go.

  • Report this Comment On September 01, 2009, at 11:56 AM, buildakicker wrote:

    I thought this post would have some heat in it. If they would have just invested in 20 stocks from the Stock Advisor with the $trillions they have BORROWED they would be doing way better. :)

    Since when did investing money you don't have really work out? Most folks are in real deep because of this stuff.

  • Report this Comment On September 01, 2009, at 3:43 PM, tradingmarkets wrote:

    US government is on a spending spree with people's money! Keep dreaming about recovery. It is a deflationary crash, Great Depresison style. US government may go bust!

    Housing prices are subsidized by the government. 8K tax credit will go away. In desperate need of tax revenue, federal government may remove the mortgage interest deduction for income tax some day. Tax is going up.

    Case Shiller index suggests we are still 20% above long term averages. These long term average prices are the result of bank credit inflation that lasted for 50 years. It is a hughe bubble that is deflating now. Whenever credit reaches multiples of GDP as we have it at 350% now, it implodes taking down the economy with deflation. As the money dissapears due to deflation, we should expect substantially lower home prices going forward. You cannot rely on current rent prices. They will come down too. You cannot rely on your salary, it will come down too.

    Why do we care about housing? Because when we borrow money to buy an expensive house, by lending us, bank creates brand new money. That is called bank credit. Almost all of our money is bank credit. That is why it is deflating. That is why government wants expensive housing, so that people can get a big loan and inject it into the economy. It is a ponzi scheme to make the current government look good. It is detrimental to the long term health of the economy.

    When we borrow, we create money. This money stimulates the economy. People can earn more because there is simply more money to earn. But when we pay back, the money dissapears in the banking system just like the way it was created.

    Conquer the Crash predicted this bust years ago:

    The herd behavour of the population causes these boom and bust cycles. When things get better, people start borrowing. They look at each other and do more of the same. If each person acted individually in a vacuum, while one person was borrowing, the other would be paying back debt and it would be a smooth sailing. But when the entire population borrows and goes on a shopping spree, this creates a boom. Then borrowing flattens and growth stops. And then the bill comes due. People have to pay back what they borrowed. However, almost all money in the economy is bank credit. It has principle + interest. And the principle exists, but the interest is not created yet. As people pay back debt and the money supply shrinks, it becomes harder and harder to earn enough money to pay principle + interest.

    Let's put it in numbers. Monetary system has 60 trillion US dollars. Almost all of this is borrowed money. Let us assume, when people borrowed this, they promised to pay back 100 trillion. The assumption was that through non-stop borrowing, some day there would be 100 trillion in the economy, so that we could earn it and pay it back. However, now that the music stops and everybody stops borrowing, how will the additional 40 trillion be created? So bankruptcies soar, foreclosures happen.

    Not only that, as we pay back the debt, the deflation shrinks the money supply. Instead of having 60 trillion, we end up with 30 trillion of money supply. That creates an imbalance where prices, salaries were based on an expected 100 trillion, but now we have 30 trillion.

    You figure the rest. The stock market crash will be worse than Great Depression this time. We have not seen the bottom yet:

    It will take down housing with it. It is simple math. It has happened to past generations. They were as smart as we are. Meanwhile Prechter went full short on Friday morning. Did he pick the top again?

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