With all the reports of financial trouble and central bank bailout packages in Europe, some investors are interested in buying distressed financial stocks on the theory that a government or the central bank won't let them fail.

After big drops and likely backstops, companies like Allied Irish Banks (NYSE: AIB) and Bank of Ireland (NYSE: IRE) may look like tempting, if high-risk, buys. Rather than run the investment case for those banks, I want to review the share price history of some recent U.S. bailouts on the theory that history at least rhymes, even if it doesn't repeat.

General Motors highlights the risk of investing based on bailout expectations. The U.S. government stepped in and saved the operation with cash loans and an equity stake. The stock recently returned to the market with an initial public offering, but not before a bankruptcy that wiped out investors in the old GM, which is now called Motors Liquidation. Shares of Fannie Mae and Freddie Mac have lost more than 90% since bailouts were widely anticipated. Clearly a bailout for a company doesn't mean shareholders are safe.

The table below presents a broader picture using share prices of the first eight banks to participate in the U.S. Treasury's TARP. The Friday before plan details were announced is used for the prebailout price. The table also shows the low over the remainder of 2008 for each of the stocks and the recent closing price. Historical prices are adjusted for dividends.

Stock

10/10/08 Prebailout Price

2008 Post-TARP Low

11/26/2010 Price

10/10/08 – 11/26/10 Change

Bank of America (NYSE: BAC)

$20.26

$10.92

$11.12

(45.11%)

Bank of New York Mellon

$25.37

$23.50

$27.14

6.98%

Citigroup (NYSE: C)

$13.90

$3.76

$4.11

(70.43%)

Goldman Sachs (NYSE: GS)

$86.82

$50.99

$158.22

82.24%

JPMorgan Chase (NYSE: JPM)

$40.75

$22.24

$37.50

(7.98%)

Morgan Stanley

$9.30

$8.95

$24.70

165.59%

State Street (NYSE: STT)

$42.84

$28.45

$43.84

2.33%

Wells Fargo

$27.17

$21.09

$26.65

(1.91%)


Source: Yahoo! Finance and author's calculation.

The results aren't decisive. Investors buying Goldman Sachs on prebailout speculation have done quite well; those who banked on a backstop for Citigroup aren't so happy. However, patience was rewarded across the board. Investors who waited on the details got opportunities to buy every one of these stocks at lower prices before the year ended. Those that waited for the March 2009 lows got even better deals. Even now, more than two years after TARP kicked in, my Foolish colleague Alex Dumortier makes the case that a basket of big, bailout bank stocks make for a cheap industry leader.

I don't know how the European bailouts, banks, and backstops will play out. I'm sure some investors will find great bargains in the wreckage and some will lose lots of euros. I do know that in the recent U.S. version of this play, there was no need to rush in. Investors who waited on the details and then waited for bad news or panic to depress share prices did much better than those who bought on bailout and backstop speculation.

Related Foolishness:

Fool contributor Russ Krull owns shares of Wells Fargo, but has no position in any other companies mentioned. The Fool's disclosure policy is well-capitalized, doesn't need a bailout, and serves as a Foolish backstop.