Government As Investment Manager Is Not Reassuring

Here is a look at the Government's presence (or investment) in various companies due to bailouts, rescues, etc.

click to enlarge

Graphic courtesy of the WSJ

When you look at the potential losses the FDIC had to take on in order for Citigroup (C) to buy Wachovia (WB), it's laughable that the Government is trying to make the claim that Wachovia wasn't a bank failure. At the end of the day, the government stepped in, agreed to take on losses and brokered the bank's sale to Citigroup. If that doesn't spell F-A-I-L-U-R-E I don't know what does. It seems to me that the only difference is that Wachovia was sold AS it was failing and WAMU (WM) was sold right after. Regardless, at the end of the day, the FDIC's exposure to the Wachovia deal is far greater than its exposure the WAMU failure, so trying to classify Wachovia as anything other than a failure is rather silly.

Looking at the government's growing de facto hedge fund (or private equity) portfolio, you have to wonder who in the government is going to be responsible for managing these investments, what sort of oversight will be involved, and who will be making managerial and strategic decisions, accountability back to the taxpayer, etc, etc. After all, it's not like the government has significant experience in these areas or a great track record with respect to its own finances.

Just think about it: the same government that is going to be managing (in all likelihood) well in excess of $1 trillion in private sector investments, is the same one that failed to step in and revamp the Mortgage GSEs after both of their accounting scandals in the early 00s, and instead allowed them to expand their investment activities after they began reporting losses last year.

I don't know about you, but thinking about the government's failure with the mortgage GSEs doesn't exactly fill me with confidence around their ability to manage their new round of investments.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[Ishortyou:]

Wachovia got rid off the prior toxic risky wasted bank subsidiaries and kept the good ones. Now it can start from scratch to build a new banking subsidiary with safe practice together with its remaining good outstanding subsidiaries. The current subsidiaries of Wachovia make it look like “Merrill Lynch without the toxic risky waste”, good job from management it separated the good bank from the bad bank overnight, plus its CEO Bob Steel is one of the top rated mutual fund managers. Wachovia will keep the valuable human resources and the talent that have expirience in the banking business saving them for the new banking subsidiary. Buying the municipal bonds or the auction rate securities will give the inflow of cash as long as its hold even to maturity. Some investors are taking money away from Hedge Funds going wild and putting that money into accounts manage by people that know what they are doing, Bob Steel is one of those people that know what they are doing, dont be surprise some of this money will go to Wachovia subsidiaries. Earnings will be adjusted accordingly, like simple arithmetics they will manage its expenses vs its earnings to come ahead in capital and start piling up cash (saving cash a hard job for most of us that live on debt), this new cash will give them the jump start of a new banking subsidiary without even thinking about to sell its remaining subsidiaries.Forgot to mention that Wachovia owns a hudge Insurance subsidiary which is making money and has sound book of business. Lehman debt is bonds most of them senior, as bankrupt as Lehman is those bonds get paid. ARS are Municipal Bonds as bonds they get paid, hold into maturity they get paid in principal, those ARS are cash flow. Preferred dividends will get paid accordingly because the holding company does not own the banking subsidiaries anymore so modification are going to be made. Getting rid off the toxic waste risky bank related subsidiaries is a good strategy and converting the remaining broker one to a new bank subsidiary with clean sheets is a good one too.

2008 Oct 02 05:40 AM

[Kinabalu:]

Everyones talking about the governments potential losses in these takeovers. I think the government should farm out the ultimate disposition of these assets under an incentive contract to a profit-making entity. There is potential here for making a lot of money, particularly with AIG. This situation reminds me of Fortune Magazines "Deal of the Century" done by Apollo Investors for the Executive Life Insurance portfolio.

2008 Oct 02 02:14 PM

[ILongyou:]

This IShortyou 'investor' seems to be hurting much from the Wachovia stock collapse.... I have seen this exact same post cut-pasted on dozens of websites, forums and discussion boards. Its almost like he trying to spam his way back to profitability :) Its really funny... the desperation and denial that the game is almost over... and its not him that won. Pseudo-psychoanalysis: He probably also finds it VERY difficult to deal with losing in real life... and probably looks for everyone else to blame for his own failure.. hehehe

2008 Oct 02 03:36 PM

[Kinabalu:]

ILongyou

I had the same thought.

2008 Oct 03 01:28 AM