Ted Allrich is the founder of The Online Investor and author of Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he offers advice to investors who are just getting started.
If you own a bank stock, you know how brutal the stock market can be. Many are down more than 50% as the subprime mortgage mess continues to shock all investors. But some banks are being punished for being a bank, not for mortgages they don't even own.
Not all banks are the same. Most banks make mortgage loans to several different kinds of buyers for different types of properties: existing homes, new construction, and/or commercial buildings. Or they only make loans to well-qualified buyers, ones with good income and high FICO scores (your credit score). Still others make no mortgages at all, have a diversified revenue stream and are only guilty of being called banks. Finally, there are banks that have a large percentage of their revenues from international lending. Smart investors will look for all of these types and start investing a small amount in several of them, then wait for the rally that will inevitably come.
That's because this crisis will pass. It may take a year or more before all the surprises are found, but they will be found, announced, and dealt with. The banks that aren't involved in subprime mortgages will hold up better and most likely will lead a financials recovery. So which banks have no or less exposure to subprime mortgages?
The banks that do processing and trust business are one group. Included are Bank of New York (NYSE: BK), State Street (NYSE: STT), and Northern Trust (NASDAQ: NTRS). For example, BK is one of the world's largest asset administration firms with the 2007 acquisition of Pittsburgh-based Mellon Financial. The merger fit in with the company's other areas of focus, asset management and corporate trust services. Now known as The Bank of New York Mellon, the firm has about $20 trillion in assets under custody and more than $1 trillion of assets under management. The company has a presence in over 35 countries, including more than 80 wealth management offices in the US and the UK. Its Pershing subsidiary is a leading securities clearing firm.
Another example: State Street Bank is among the top providers of mutual fund and pension processing and custody services; its target clients include large-scale institutional investors and corporations who can choose from a service menu that includes accounting, foreign exchange, cash management, securities lending, and more. Its State Street Global Advisors (SSgA) unit performs asset management services. Boston Financial Data Services, a partnership with DST Systems, provides shareholder services to clients. Another joint venture, CitiStreet (with Citigroup), manages retirement and pension plans.
There are others. And not just in banks. They are Savings and Loans, brokerage firms, insurance companies, all of the financials. Investors can find good stocks in each of these, ones that have no holdings in subprime mortgages or have great risk managers (think of Goldman Sachs (NYSE: GS) in the brokerage area). Just because the headlines look bad for many banks or financial institutions in general, it doesn't mean there aren't good investments among them. You just have to look harder and dig deeper to understand exactly what the bank or financial institution does.
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Filed under: Other issues, Citigroup Inc. (C), JPMorgan Chase (JPM), Bank of New York (BK), Housing, Federal Reserve
It looks like the Super SIV roadshow is about ready to start, with the Bank of America apparently taking the lead.Left unanswered -- at least for the immediate future -- are compelling questions related to the fund's transparency, effectiveness, and cost.
The Bank of America (NYSE: BAC) announced Monday that it will lead efforts by Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) to convince smaller competitors to help finance an $80 billion bailout of the short-term debt market, Bloomberg News reported Monday, citing two sources with knowledge of the matter.
The fund's goal is to help SIVs -- structured investment vehicles -- price and trade, restoring some liquidity to the SIV market. The Super SIV would buy assets from SIVs, including corporate and mortgage debt in danger of default, then recruit smaller institutions to buy the debt. Many investors have been reluctant to invest in SIVs following the string of defaults and markdowns in the subprime mortgage and subprime-asset markets.
Analyst criticizes Super SIV
Analyst Richard Bove of Punk Ziegel & Co. is not shy regarding his criticism of the potential Super SIV:
``Why should we put something on our balance sheet that is going to result in further writedowns?'' is how most contributors will respond, Bove told Bloomberg News. ``The job of the [U.S.] Treasury isn't to go out and defraud investors.''
The Super SIV has the backing of the U.S. Treasury, even as other financial institutions initiate their own actions to deal with their SIVs -- namely, by listing them on their balance sheets:
HSBC Holdings Plc, Europe's largest bank, announced Monday it will bail out two SIVs by consolidating the SIVs' $45 billion of assets and listing them on its $2.1 trillion balance sheet, Reuters reported. HSBC said it will then set up new debt-issuing vehicles, adding that it expected other banks will follow its lead.
Economic Analysis: Punk Ziegel Analyst Bove raises perhaps the most pertinent question in the Super SIV saga to-date: Why are new investors/institutions being asked to invest? As apparently outlined, the proposed Super SIV would add reduced-value, low-value (and in some cases no-value) assets to new investors' balance sheets. Their shareholders can justifiably ask, 1) 'What's the purpose?