The Air Comes Out of Financial Stocks

After a month of logging double-digit percentage gains day after day on no news, low-quality financial stocks succumbed to reality yesterday:

Company

Tuesday's Decline

AIG (NYSE: AIG  )

(20.58%)

Fannie Mae (NYSE: FNM  )

(17.62%)

Freddie Mac (NYSE: FRE  )

(17.03%)

Hartford Financial (NYSE: HIG  )

(11.34%)

Ambac Financial (NYSE: ABK  )

(9.66%)

Citigroup (NYSE: C  )

(9.20%)

Bank of America (NYSE: BAC  )

(6.42%)

This was inevitable. Even Lehman Brothers -- yes, that Lehman Brothers -- saw its pink-sheet-listed shares almost quintuple last month. Obviously, that's nuts. There's speculation, and there's insanity. A bankrupt company's stock attracting such attention is purely the latter. The rally in financial stocks was getting grossly out of control.

Some of these companies, particularly the first three on the list, likely have no value left for common shareholders. Fannie Mae doesn't even try to beat around this in its annual report, writing:

Prior to the conservatorship, our business was managed with a strategy to maximize shareholder returns. However, our conservator has directed us to focus primarily on fulfilling our mission of providing liquidity, stability and affordability to the mortgage market and to provide assistance to struggling homeowners ...

We can give no assurance that we will remain a shareholder-owned company. At the time we were placed into conservatorship, the then Secretary of the Treasury indicated that there is a consensus that we and Freddie Mac pose a systemic risk and that we cannot continue in our current form ...

According to a statement made by the then Secretary of the Treasury on September 7, 2008, because we are in conservatorship, we 'will no longer be managed with a strategy to maximize shareholder returns.'

There's really no other way a company can politely say, "Hey, people, the government owns us. There's nothing left for you. Do yourself a favor and stay away from our stock."

There's value somewhere in banking, but the complexity and optimism that's permeated the industry lately makes finding it risky and difficult. The Wall Street Journal reported yesterday that Bank of America might begin repaying taxpayers part of the $45 billion in TARP funds it holds. This is great news for the company -- maybe the first truly good news in a year -- and shares still fell more than 6%. If that isn't a sign that optimism got waaay ahead of itself, I'm not sure what is.

For related financial Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (17)

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  • Report this Comment On September 02, 2009, at 2:29 PM, doggieh wrote:

    Well,nasty facts indeed,but C and BAC is still a long term play for me...and left the rest of the group for trading

  • Report this Comment On September 02, 2009, at 2:41 PM, slidexperto wrote:

    Watch out for Citigroup (stock symbol = C) rising to $6.00 next starting today until next week and Dynegy (symbol = DYN)zooming to $2.50 until next week. Citigroup shares are mostly Democrat-owned as bailed out by the Obama administration, see how the other bailed-out banks are zooming up. The Saudi Prince Talal who owns 15% Citigroup stocks is buying by the millions, and he invested a lot at Citigroup when it was around $12 - $14. I just bought 5,000 shares each stock for future selling at above mentioned prices. Good luck, you know what to do...! I was right last week when I predicted about Eastman Kodak zooming to from $4.30 to $5.50...!

  • Report this Comment On September 02, 2009, at 4:39 PM, oghowie wrote:

    Yup, C and BAC are a long term buy on pullbacks. I'd wait a bit though since the market seems to want to go down from here.

  • Report this Comment On September 02, 2009, at 5:15 PM, LessGovernment wrote:

    I don't know how anyone can predict with certainty what the bank stocks will do since their accounting is still a black hole. There are many, many billions of dollars of toxic soup just waiting to be served.

    If and when the interest rates (currently about 0%) charged them by the Fed (a stinking money cartel) do increase, one thing will be certain. Cheap money won't hide the toxic investments any longer. If I were the managers of the banks, I would be getting the stuff off my books now, because with trillion dollar a year deficits staring us in the face, wanting tax money from the economy to pay the interest, one thing is for certain. At some point, it all goes poof again.

  • Report this Comment On September 02, 2009, at 6:05 PM, ozzfan1317 wrote:

    I avoid the Sector in genral if you can understand whats on their balance sheet then dont invest is my take. I will stick to companies that I understand what they mke and am confident the demand for it wont slip much.

  • Report this Comment On September 03, 2009, at 5:31 AM, ganit wrote:

    If you do a serious DD regarding ABK, you'll find out there's a huge, but I mean huge upside to this stock.

    Good Luck.

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