LONDON -- You'd have to be crazy to buy Standard Chartered (LSE: STAN.L ) right now, wouldn't you?
One of the few banks to survive the financial crisis with its reputation intact, it is now facing the wrath of New York regulators after being accused of moving $250 billion of Iranian money in defiance of U.S. sanctions.
That's the sort of thing that drives the U.S. mad. So mad, in fact, that the U.K.-listed bank even risks losing its license to trade on Wall Street.
Yet there are clearly plenty of crazy people out there, because over the last couple of days investors have been snapping up shares in the bank.
At first, investors ran in fear. Then greed took over.
Before the crisis broke, Standard Chartered shares would have cost you 1,603 pence. By Wednesday morning, they had fallen to 1,125 pence, a drop of 30%. I hope you didn't sell at that point, because they then rallied 17% to close at 1,315 pence. At the time of writing on Friday morning, the shares are trading at 1,350 pence.
Given the charge sheet -- money laundering for the country that annoys the U.S. like no other -- you might expect the share price to be quivering in a bombproof bunker. But that's not how investors think. Fear and greed drive them crazy.
Muck and brass
Standard Chartered directors have fought back, claiming the amount involved was a mere $14 million, largely owing to administrative errors. The bank claims 99.9% of its transactions with Iran complied with U.S. regulations.
Bank of England governor Mervyn King did his bit, criticizing New York regulator Benjamin Lawsky for pre-empting a joint investigation by five separate agencies.
Standard Chartered is down nearly 15% on the week, but plenty of people will have made money from it, says Danny Cox at Hargreaves Lansdown: "Investors who bought at the bottom and sold on Wednesday night have made a tidy 27%."
As Cox rightly said, buying the shares of a company in turmoil is a risky business, as anybody who bought shares in Northern Rock five years ago discovered when they lost all their money.
In deep water
Last time I tried to make money out of a company crisis was during the BP (LSE: BP.L ) Deepwater drilling disaster in April 2010. I piled into the stock a few days into the drama, thinking the 20% share price plunge made BP a buy. Then I switched on the lunchtime news and realized I'd underestimated the scale of the crisis.
At the time, analysts feared the crisis could cost BP $8 billion or $9 billion. Now the total price stands at $38 billion and rising. My original purchase is still underwater.
Various attempts to take advantage of the banking crisis to buy Barclays, Lloyds Banking, and Royal Bank of Scotland on the cheap also cost me a small fortune. I lost at least half the money I invested.
Standard Chartered's rapid share price recovery shows why investors should resist the urge to flee at the first sound of gunfire. But should they charge so enthusiastically into the smoke and flames?
The problem with buying in the middle of a firefight is that you don't know who will be left standing at the end of it. The New York authorities claim Standard Chartered laundered $250 billion. The bank puts the figure at $14 million. There is a world of difference between those two figures.
I don't know which number is correct, and neither do you. But the answer will determine whether now is a good or bad time to buy Standard Chartered.
The bank certainly fails one key investment test: Only buy things you understand. Basically, you'd be speculating.
Money, money, money
Standard Chartered was meant to be the boring bank. Now it is a "rogue institution" caught in the crosshairs of regulators desperate to appease the public by gunning down evil bankers.
Recent penalties have been severe. HSBC has set aside 445 million pounds to cover potential U.S. fines after being caught laundering money for drug lords, terrorists, and rogue states. Barclays was fined 290 million pounds for fiddling LIBOR. U.K. banks have made 10 billion pounds of provisions for mis-selling payment protection insurance.
At best, Standard Chartered will get away with a minimum fine. At worst, it could lose its New York banking license and be barred from doing business in the U.S. Although it does most of its business in Asia, Africa, and the Middle East, the reputational damage and other fallout could be massive.
Investor, know thyself
Anybody buying Standard Chartered is speculating on "known unknowns and unknown unknowns," to coin a phrase. We may discover more after Aug. 15, when Standard Chartered appears before the New York state superintendent of banking. Or we may discover how little we know. This one could drag on and on.
That's not how I like to invest. What about you?
He avoided techs in the dot-com bubble and banks in the credit boom. But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report: "8 Shares Held By Britain's Super Investor."
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