When in Doubt, Invest in Bailout

Hypothetical. Let's say it's 1960 and you've decided to join a golf club. Good choice -- it's a lovely game that teaches investors important lessons about swearing and drinking. Now, your town has two golf clubs, both of which are having trouble attracting new members, and one of them is going to go under in the next year. You're worried that the one you join might sink, frittering away your joining fee on new sand traps. The two clubs are identical in almost every way with one interesting distinction: Ballyhoo is where most of the mechanics play, while Ballyhigh is where the bankers belong. Who do you think is going under?

Remember when you were picking those stocks back in 2006, wondering how much the company could get for its assets if it went under? Those days are gone. Say hello to the world of U.S. government-backed stocks. These companies either have major government ownership, or they provide a service that the U.S. government cannot live without. You may have just missed the AIG (NYSE: AIG  ) boat, but there are plenty of other fish in the sea, and thanks to the government, these fish are effectively farm-raised. Just figure out how big a net you need, and start scooping. Here are three to start with.

Government meddling
Look at GM (NYSE: GM  ) . The government recently denied a request from GM to sell the shares, as it would mean taking a $15 billion loss . The government shares break even at $53, according to the Wall Street Journal, and allegedly, the Treasury isn't even going to consider selling until the stock is in the $30s. So what you're hearing is that the GM's management wants the government to sell, but that the government won't take a loss as large as it now faces. So management has a huge incentive to try and push the stock up to get the U.S. out. At its current $25 share price, it means the Treasury is looking for at least a 20% price increase before selling. Hello, profit!

Now, if GM has shown us anything, it's that even with the help of big brother, you need to make products that people enjoy if you want to do well. So far, that's been a bit hit and miss, and GM has bounced around since returning to the market in late 2010. But maybe that just means you should look to companies that don't seem to need happy customers -- banks, perhaps.

Banking on past failures
So the car game isn't for you -- you're looking for something that the U.S. doesn't own but something that still owes the U.S. some cash. Let me introduce you to Synovus Financial (NYSE: SNV  ) . The regional bank is based in the Southern U.S., and is currently sitting on close to $1 billion in government cash from the Troubled Assets Relief Program. That means the government has a good reason to watch the bank closely and make sure that it doesn't do anything stupid -- again -- before it has a chance to repay those loans.

On the most recent earnings call, CEO Kessel Stelling said that the bank is planning on repaying its borrowing between the second and fourth quarters in 2013 . That's good news for investors, as banks that repay their TARP loans have seen strong stock gains leading up to those repayments . After the bank gets out of the government's pocket, things tend to level out.

Unfailable
I have a few tricks up my sleeve. I can juggle, for instance, and I can bake a cake. I cannot, however, act as a tri-party repo agent. Luckily for me -- and U.S. financial markets -- JPMorgan (NYSE: JPM  ) has that one under wraps. While the bank isn't owned by the U.S., and it doesn't need to pay back a huge TARP loan, it has something better: an unfillable niche.

To summarize, imagine a trade with a brokerage that needs to make trades during the day but that doesn't take customer assets on one side, and a money market fund provider on the other. One has cash and wants to make some interest on it, and one has assets but wants cash. So the fund trades its cash for the assets of the brokerage, and says it will sell the assets back at the end of the day for a higher fee. When that deal starts to get huge and complex -- the third-party repo market is around $1.5 trillion  -- a middleman appears.

JPMorgan decreases risk for both parties and can cover any shortfall that needs to be covered. Only one other American bank can do this. JPMorgan's services are required by the institution, and it is not going anywhere.

While none of these companies are guaranteed to go up or even to stay in business, their association with the U.S. government and their usefulness to the financial markets certainly lends them some safety. To get all the dirty details on JPMorgan -- Warren Buffett thinks Jamie Dimon would make a bang-up Treasury secretary, by the way  -- check out the Motley Fool's in depth review of the bank. I can't say that I'm dying to get into banks, but JPMorgan sure looks like a fortress from the outside. Sign up for the report to get a view from inside the walls.


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  • Report this Comment On December 12, 2012, at 7:01 PM, nickjob wrote:

    If Jpm is so good A bank, why dont they pay back the funds they stole from mf global customers?

  • Report this Comment On December 13, 2012, at 9:28 AM, TMFRedRam wrote:

    Thanks for reading.

    I think my bigger point is that it - unfortunately - doesn't matter if they're a good bank, especially not in the moral sense. Instead, they've become an irreplaceable bank.

    Cheers, Andrew

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