I am sick and tired of hearing my national government tell me the reason they have to take OUR money to pay bonuses for AIG, Goldman (GS), Morgan Stanley (MS), et al is that these firms are “too big to fail.” Horsefeathers. I say, if they’re too stupid to survive on their own, let’em fail.
Do our regulators / Congress / other assorted politicians really believe that without Citi (C) and B OF A (BAC), Americans will start paying their bills with money orders and wire transfers from Western Union? No way. Americans are far brighter than their elected representatives represent. If Citi goes away, we’ll just bank with a different, better-capitalized, more customer-focused bank that doesn’t spend its energy trading six-sigma, seventh-tranche bits of derivatives of derivatives. You know, banks that take in money from depositors and lend it responsibly to borrowers.
Way back in October, when “They’re too big to allow them to fail,” was first being intoned by the now-at-an-undisclosed-location Hank Paulson, I went on record as opposing the bailout. I said I’d prefer “to see Americans benefit by receiving equity ownership stakes from the miscreant executives, traders and firms who created this mess. If actions have no consequences, then the venal will commit them again, laughing at our good intentions all the way to the Hamptons... I’d rather see $700 billion go to injured bystanders on Main Street than to those who now hold us hostage by fanning the false flames that they’re all simply too big to fail, claiming Main Street will suffer a terrible tidal wave if Wall Street were to see a tiny ripple and lose a single bonus.”
I’ve been in the financial business 37 years. Now I don’t know banking as well as I know the brokerage business, so I sat down with a bottle of 37-year-old (only 28 of it in the cask; I just can’t bring myself to empty this bottle) Ben Nevis Scotch whiskey to research every time a Wall Street firm claimed it was “too big to fail.” In the past, we allowed every one of them to fail or made some other brokerage and its shareholders – not the unaffiliated-with-Wall-Street American citizen – take on their risks and possible rewards. These are just a few of the firms that disappeared into bankruptcy or were shotgun-married into other firms by the Fed or the Treasury:
E. F. Hutton — A fine old firm founded in 1904 that by 1985 had pled guilty to 2,000 counts of mail wire fraud. Bought for a song by Shearson.
First Boston — The world’s biggest M&A player got greedy, over-reached and, in 1990, in violation of Glass Steagall, the Federal Reserve decided the integrity of the financial system was at stake so to avoid bankruptcy shotgun-married it to Credit Suisse (CS) of Switzerland.
Kidder Peabody — Bought by GE, Kidder got into insider-trading trouble (including false accusations against Richard Wigton, a courtly gentleman who helped train me in 1972, and was led from his office in handcuffs as a stunt by an ambitious prosecutor named Rudy Giuliani. Wigton was shortly cleared of all false charges). Was dumped by GE over to Paine Webber (PW).
Paine Webber — then itself over-reached, got in trouble, and was bought for a song by UBS of Switzerland.
White Weld — got in trouble, was bought for a song by Merrill Lynch, which got into big mortgage-backed securities trouble, and was bought for a song by B of A.
Bache — bought cheap by Prudential (PRU).
Drexel Burnham Lambert — founded in the depths of the Depression, insider-trading felons Michael Milken, Ivan Boesky & Dennis Levine later dragged the firm into bankruptcy. A massive failure, no bailout was offered -- probably because the Treasury Secretary, Nicholas Brady, had been chairman of competitor Dillon, Read when Drexel bested them on a hostile takeover deal.
Salomon Bros — bought by Travelers in 1998, which was bought by Citicorp.
Smith Barney — bought by Primerica, which was bought by Commercial Credit, which bought a piece of Travelers, which was bought by Citicorp.
Hornblower & Weeks, Hemphill, Noyes -- got into trouble for writing “exaggerated and misleading” research. Forced into Shearson. I just like saying Hornblower & Weeks, Hemphill, Noyes.
Shearson — bought CBWL-Hayden, Stone; E.F. Hutton; Hornblower; Hammill & Co, and others on the way to being itself bought by American Express (AXP).
Dean Witter — merged with Reynolds & Co in what was then the largest securities industry merger in history. Acquired by Sears (SHLD), then merged into Morgan Stanley.
Bear Stearns & Lehman Bros. -- you know the story...
Two things emerge from this trip down Memory Lane. First, almost every time one of these firms did something greedy or stupid, there was a hue and cry from Wall Street that civilization as we know it would end if we allowed one Wall Street firm to fail. We allowed it. Life went on. One fell; a new one arose. It’s called capitalism.
Second, situational ethics is a crock. If we decide it’s OK to cheat the American public because too much money is at stake not to, we’ve lost way more than money. If we don’t have the moral fiber to hold the rapacious responsible for their actions, we’ve lost something considerably more important than a few hundred billion dollars.
Oh, yes. How to play it. I figure AIG is a Dead Man Walking and Citi and B OF A aren’t far behind. I wouldn’t buy Goldman or Morgan for the same reason some people don’t buy tobacco companies or gambling companies. (They sell snake oil and it’s addictive and bad for your -- in this case, financial -- health.) But I am seeking and finding lots of smaller regional banks and brokers that I believe will gain market share. And I’m buying the preferred shares of these firms because they have been unfairly knocked down in concert with the preferreds of C, BAC and the other losers. It’s overdone. I’m getting 12%-16% yields on preferreds that, if I’m correct and the company survives to redeem them, will redeem at par, what I paid 50 cents on the dollar for.
Five banks I think will gain market share are Wells Fargo (WFC), US Bancorp (USB), Key Corp (KEY), SVB Financial (SVB), and PNC Financial (PNC). Each has preferreds selling well below redemption value. I’ve been buying them when they get to 50% or less of redemption price. Among their offerings are WFC pfds WFC-J, FWF, JWF, WSF and WCO; US pfds USB-E, USB-G, and USB-J; Key pfds KEY-A, KEY-B, KEY-D, KEY-E, and KEY-F; SIVB pfd SIVBO; and PNC pfds PNC-C, PNC-D, PNC-L, PNU and PNH.
DISCLOSURE: Long at least one preferred series of each of the above banks. Looking for more at the right price.